Item 1 - Financial Statements
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE
SHEETS
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
414,130
|
|
|
$
|
132,803
|
|
Trade accounts receivable
|
|
|
86,806
|
|
|
|
78,843
|
|
Accounts receivable - related party
|
|
|
2,203
|
|
|
|
4,506
|
|
Prepaid expenses
|
|
|
32,008
|
|
|
|
32,239
|
|
Total current assets
|
|
|
535,147
|
|
|
|
248,391
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
136,933
|
|
|
|
141,080
|
|
Investment
|
|
|
10,000
|
|
|
|
10,000
|
|
Customer relationships, net
|
|
|
30,869
|
|
|
|
33,675
|
|
Proprietary content, net
|
|
|
443,054
|
|
|
|
459,463
|
|
Trade name
|
|
|
69,300
|
|
|
|
69,300
|
|
Non-compete agreements, net
|
|
|
19,725
|
|
|
|
21,040
|
|
Trademarks
|
|
|
22,592
|
|
|
|
22,592
|
|
Goodwill
|
|
|
1,094,702
|
|
|
|
1,094,702
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,362,322
|
|
|
$
|
2,100,243
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
36,603
|
|
|
$
|
27,229
|
|
Accrued expenses
|
|
|
107,747
|
|
|
|
103,654
|
|
Deferred revenue
|
|
|
51,715
|
|
|
|
32,739
|
|
Line of credit
|
|
|
19,198
|
|
|
|
19,732
|
|
Notes payable
|
|
|
181,834
|
|
|
|
93,397
|
|
Pre-merger payables
|
|
|
75,382
|
|
|
|
99,056
|
|
Total current liabilities
|
|
|
472,479
|
|
|
|
375,807
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock - 300,000,000 shares authorized; $0.001 par value
|
|
|
35,213
|
|
|
|
34,863
|
|
Additional paid-in capital
|
|
|
5,141,920
|
|
|
|
4,768,596
|
|
Accumulated deficit
|
|
|
(3,287,290
|
)
|
|
|
(3,079,023
|
)
|
Total stockholders’ equity
|
|
|
1,889,843
|
|
|
|
1,724,436
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,362,322
|
|
|
$
|
2,100,243
|
|
The accompanying notes are in integral
part of these consolidated financial statements.
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Investment management fees
|
|
$
|
244,379
|
|
|
$
|
229,986
|
|
Service income
|
|
|
517,961
|
|
|
|
387,243
|
|
Commissions
|
|
|
9,156
|
|
|
|
10,664
|
|
Rental income
|
|
|
1,500
|
|
|
|
–
|
|
Total revenue
|
|
|
772,996
|
|
|
|
627,893
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
20,258
|
|
|
|
17,331
|
|
Professional services
|
|
|
270,093
|
|
|
|
342,766
|
|
Depreciation and amortization
|
|
|
24,677
|
|
|
|
39,166
|
|
General and administrative
|
|
|
121,826
|
|
|
|
58,990
|
|
Management fees - related party
|
|
|
53,000
|
|
|
|
63,333
|
|
Marketing
|
|
|
101,878
|
|
|
|
115,500
|
|
Salaries and wages
|
|
|
377,720
|
|
|
|
415,230
|
|
Total operating expenses
|
|
|
969,452
|
|
|
|
1,052,316
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(196,456
|
)
|
|
|
(424,423
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
191
|
|
|
|
(600
|
)
|
Interest expense
|
|
|
(12,002
|
)
|
|
|
(2,555
|
)
|
Total other (expense) income
|
|
|
(11,811
|
)
|
|
|
(3,155
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(208,267
|
)
|
|
$
|
(427,577
|
)
|
|
|
|
|
|
|
|
|
|
LOSSES PER SHARE - Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
The accompanying notes are in integral part
of these consolidated financial statements.
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(208,267
|
)
|
|
$
|
(427,577
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,677
|
|
|
|
39,166
|
|
Write off of fixed assets
|
|
|
–
|
|
|
|
15,787
|
|
Services provided to relieve accounts receivable - other
|
|
|
–
|
|
|
|
(23,983
|
)
|
Changes in operating assets and liabilities, net of effects of purchase of subsidiaries
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(7,963
|
)
|
|
|
(13,522
|
)
|
Accounts receivable - related party
|
|
|
2,303
|
|
|
|
28,519
|
|
Prepaid expenses
|
|
|
231
|
|
|
|
(40,307
|
)
|
Accounts payable - trade
|
|
|
9,374
|
|
|
|
(20,356
|
)
|
Accounts payable - related party
|
|
|
–
|
|
|
|
(2,300
|
)
|
Accrued expenses
|
|
|
4,093
|
|
|
|
44,193
|
|
Deferred revenue
|
|
|
18,976
|
|
|
|
25,000
|
|
Net cash used in operating activities
|
|
|
(156,576
|
)
|
|
|
(375,381
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash paid for purchase of property and equipment
|
|
|
–
|
|
|
|
(15,787
|
)
|
Deposit for future acquisition
|
|
|
–
|
|
|
|
35,000
|
|
Purchases of trademarks
|
|
|
–
|
|
|
|
(79
|
)
|
Net cash provided by investing activities
|
|
|
–
|
|
|
|
19,135
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
100,000
|
|
|
|
24,391
|
|
Payments on line of credit
|
|
|
(11,563
|
)
|
|
|
–
|
|
Payments on note payable
|
|
|
(534
|
)
|
|
|
–
|
|
Proceeds from the sale of common stock
|
|
|
350,000
|
|
|
|
175,000
|
|
Net cash provided by financing activities
|
|
|
437,903
|
|
|
|
199,391
|
|
|
|
|
|
|
|
|
|
|
TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
281,327
|
|
|
|
(156,855
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
132,803
|
|
|
|
801,542
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
414,130
|
|
|
$
|
644,687
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
12,003
|
|
|
$
|
2,555
|
|
Taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Common stock issued upon acquisition of: Tax Coach Software, LLC (Note 9)
|
|
$
|
–
|
|
|
$
|
1,904,620
|
|
Net assets (liabilities) assumed for purchase of: Tax Coach Software, LLC (Note 9)
|
|
$
|
–
|
|
|
$
|
809,918
|
|
Settlement of payables owed by legacy Pacific Oil Company Stockholders
|
|
$
|
23,674
|
|
|
$
|
–
|
|
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.
On September 30, 2016, Financial Gravity
Holdings entered into a reverse merger transaction with Pacific Oil Company (the “Merger”). Pacific Oil 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 the Merger, the Articles of Incorporation
were amended to change the name of the Company to Financial Gravity Companies, Inc. 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.).
Financial Gravity Holdings is now a subsidiary
of the Company. 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.
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 December 31, 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, an Ohio limited
liability company (“TCS”), was acquired effective October 1, 2015. The purchase was made by FGH. Located in Cincinnati,
Ohio, TCS 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 December 31, 2016 and September 30, 2016.
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 it is 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 as
part of the TCS purchase have been recognized in the accompanying consolidated balance sheets at $44,900, the value attributed
to such relationships 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 each of the quarters ended December 31, 2016 and 2015, the Company recorded amortization
expense of $2,806, respectively, on this intangible asset, which is included in depreciation and amortization expense in the accompanying
consolidated statements of operations. Accumulated amortization at December 31, 2016 was $14,031 and $11,225 at September 30, 2016.
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 such
content 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 each of the quarters ended December 31, 2016 and 2015, the Company recorded amortization expense of $16,410
on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements
of operations. Accumulated amortization at December 31, 2016 was $82,048 and $65,638 at September 30, 2016.
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 such name
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 December 31, 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 such list
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 31, 2016 was $53,800.
Non-compete Agreements
Non-compete agreements entered into as
a part of the TCS purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed
to such agreements 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 each of the quarters ended December 31, 2016 and
2015, the Company recorded amortization expense of $1,315 on this intangible asset, which is included in depreciation and amortization
expense in the accompanying consolidated statements of operations. Accumulated amortization at December 31, 2016 was $6,575 and
$5,260 at September 30, 2016.
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 December 31, 2016.
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 December 31, 2016, and September 30, 2016. However, goodwill attributed
to Cloud9 and MDP was deemed to be impaired during the year ended September 30, 2016 as the assumptions for what those entities
would be used for at acquisition had significantly changed and the valuation of those entities during the year did not support
the goodwill at acquisition.
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.
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 December 31, 2016 and September
30, 2016.
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.
Losses Per Share
Basic earnings per common share is computed
by dividing net losses available to common stockholders by the weighted average number of common shares outstanding for the reporting
period. Average number of common shares were 35,037,900 and 31,601,977 for the quarters ended December 31, 2016 and 2015, respectively.
For the quarters ended December 31, 2016
and 2015, approximately 2,350,346 and 1,395,996 common stock options, respectively, were not added to the diluted average shares
because inclusion of such shares would be antidilutive. The diluted shares for December 31, 2016 include 150,000 warrants and 2,200,346
in options.
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 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 is calculated net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred
revenue in the accompanying consolidated balance sheets.
Tax Coach Software has 3 types of services
that are charged and collected on a month to month subscription basis (Tax Coach 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 $101,878 and $115,500 for the quarters ended December 31, 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.
Adjustments
All adjustments that, in the opinion of
management, are necessary for a fair presentation for the periods presented have been reflected in the financial statements.
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 January 2017, the FASB issued ASU No.
2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323). ASU
2017-03 amends the Codification for SEC staff announcements made at two Emerging Issues Task Force (EITF) meetings. At the September
2016 meeting, the SEC staff expressed its expectations about the extent of disclosures registrants should make about the effects
of the new FASB guidance (including any amendments issued prior to adoption) on revenue (ASU 2014-09), leases (ASU 2016-02) and
credit losses on financial instruments (ASU 2016-13) in accordance with SAB Topic 11.M. That Topic requires registrants to disclose
the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. ASU
2017-03 incorporates these SEC staff views into ASC 250 and adds references to that guidance in the transition paragraphs of each
of the three new standards. The ASU also conforms ASC 323-740-S99-2, which describes the SEC staff’s views on accounting
for investments in qualified affordable housing projects, to the guidance issued in ASU 2014-01. The staff announced the change
at the November 2016 EITF meeting.
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. The Company does not expect any significant
financial impact to the financials statements upon adoption of this standard.
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. The Company does not expect
any significant financial impact to the financials statements upon adoption of this standard.
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 December
31 and September 30, 2016:
|
|
Estimated
Service Lives
|
|
December 31,
|
|
|
September 30,
|
|
Furniture and fixtures
|
|
5 years
|
|
$
|
6,994
|
|
|
$
|
6,994
|
|
Internally developed software
|
|
10 years
|
|
|
152,000
|
|
|
|
152,000
|
|
|
|
|
|
|
158,994
|
|
|
|
158,994
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
22,061
|
|
|
|
17,914
|
|
|
|
|
|
$
|
136,933
|
|
|
$
|
141,080
|
|
Depreciation expense was $4,146 and $5,186 during the quarters
ended December 31, 2016 and 2015, respectively.
Trademarks consist of the following:
Trademarks at September 30, 2015
|
|
$
|
20,174
|
|
Trademarks purchased at cost
|
|
|
2,418
|
|
Trademarks at September 30, 2016
|
|
|
22,592
|
|
Trademarks purchased at cost
|
|
|
–
|
|
Trademarks at December 31, 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 $19,198 and $19,732 at December 31, and September
30, 2016, 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 $93,097 and $93,397 at December 31,
2016 and September 30, 2016, respectively.
The Company entered into a Business
Loan and Security Agreement to Small Business Financial Solutions, LLC, on October 28, 2016 in the amount of $100,000. The
transaction is structured as an advance against assets. The lender has a security interest in all collateral of the Company,
and outstanding under this note payable was $88,737 and $0 at December 31, and September 30, 2016, respectively.
Accrued expenses consist of the following
at December 31, and September 30, 2016:
|
|
December 31,
|
|
|
September 30,
|
|
Accrued payroll
|
|
$
|
49,025
|
|
|
$
|
44,327
|
|
Accrued operating expenses
|
|
|
58,472
|
|
|
|
59,077
|
|
Deferred rent
|
|
|
250
|
|
|
|
250
|
|
|
|
$
|
107,747
|
|
|
$
|
103,654
|
|
For the three months ended December 31,
2016 and 2015, the effective tax rate of 0% varies from the U.S. federal statutory rate primarily due to state income taxes, net
losses, certain nondeductible expenses and an increase in the valuation allowance associated with the net operating loss carryforwards.
Our deferred tax assets related to net operating loss carryforwards remain fully reserved due to uncertainty of utilization of
those assets.
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 December 31, and September 30, 2016:
|
|
December 31,
|
|
|
September 30,
|
|
Net non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
$
|
1,150,551
|
|
|
$
|
924,304
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
30,787
|
|
|
|
109,471
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
1,119,764
|
|
|
|
814,833
|
|
Less valuation allowance
|
|
|
(1,119,764
|
)
|
|
|
(814,833
|
)
|
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 quarters ended December 31, 2016 and 2015 was $22,201 and $20,236,
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.
Future minimum rental obligations as of
December 31, 2016 are as follows:
2017
|
|
$
|
61,938
|
|
2018
|
|
|
68,400
|
|
2019
|
|
|
5,700
|
|
|
|
$
|
136,038
|
|
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 has outstanding payables
that the previous owners are in process of liquidating. These liabilities have been recorded 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 (as adjusted after the 3 to 1 split), 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 the 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 membership interests, for shares of common stock of the Company. The total number of shares of common stock issued
to the owners of Tax Coach Software was 6,000,000 shares (as amended), at par value of $0.00001 per share, in exchange for 100%
of the membership interests of Tax Coach Software. Goodwill, as a result of this acquisition, is not deductible for tax purposes.
Certificates representing the shares of
common stock which served as the purchase price, 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 entered
into 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 employment 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 employment 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 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.
In addition to the referenced employment
agreements, three consulting agreements were entered into 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 three 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
|
|
Note payable
|
|
|
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.
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.
Warrants
As part of the sale of common shares starting
October 2016, the Company granted to investors who invest at value of $100,000 or above common stock purchase warrants (the “Warrants”).
In the quarter ended December 31, 2016 there were three individual investments of $100,000 for which the Company issued warrants
for the purchase of 75,000 shares of common stock of the Company at an exercise price of $1.25 per share for a 1-year term and
an additional 75,000 shares of common stock of the Company at an exercise price of $1.50 for a 2-year term.
The Company follows the provisions of ASC
815, “Derivatives and Hedging”. ASC 815 requires freestanding contracts that are settled in a company’s own stock
to be designated as an equity instrument, assets or liability. Under the provisions of ASC 815, a contract designated as an asset
or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification
as equity, until the contract is exercised or until the contract expires. However, the Company determined that these warrants should
be accounted for as equity and as such no determination of fair value was necessary.
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.
During the quarter ended December 31, 2016,
Financial Gravity Holdings has sold 350,000 shares of common stock for $350,000.
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 pursuant to the exercise of options 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.
Effective November 22, 2016, the Company
established the 2016 Stock Option Plan (the “2016 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 pursuant to the exercise of options
under the 2016 Plan is 20,000,000. 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 ten years from the date of adoption of the 2016 Plan.
Stock option activity is summarized as follows:
|
|
Shares
Under
Option
|
|
|
Value of
Shares
Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding - September 30, 2015
|
|
|
1,500,996
|
|
|
$
|
7,359
|
|
|
$
|
0.33
|
|
|
|
|
|
Granted
|
|
|
1,024,400
|
|
|
$
|
19,677
|
|
|
|
1.00
|
|
|
|
108 months
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Canceled or expired
|
|
|
325,050
|
|
|
$
|
4,907
|
|
|
|
0.33
|
|
|
|
–
|
|
Outstanding - September 30, 2016
|
|
|
2,200,346
|
|
|
$
|
22,129
|
|
|
|
0.64
|
|
|
|
106 months
|
|
Granted
|
|
|
12,000
|
|
|
$
|
11,532
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2016
|
|
|
2,212,346
|
|
|
$
|
33,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - December 31, 2016
|
|
|
2,200,346
|
|
|
|
|
|
|
|
0.64
|
|
|
|
103 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
of $22,129 for these options was included in salaries and wages in the year ended September 30, 2016.
There were 12,000 stock options granted
from the 2016 stock option plan in December 2016. The unamortized value of these stock options is $11,532 at December 31, 2016.
|
12.
|
RELATED PARTY TRANSACTIONS
|
Accounts receivable due from the majority
stockholder of the entity, included in accounts receivable – related party in the accompanying consolidated balance sheets
was $2,203 and $4,506 as of December 31, and September 30, 2016, respectively.
Management fees paid to the majority stockholder
of the entity, included as management fees - related party in the accompanying consolidated statement of operations were $53,000
and $63,333 for quarters ended December 31, 2016, and 2015, respectively.
A board member who is also a stockholder
provided services to the Company. Expenses for these services totaled $15,000 and $15,000 for the quarters ended December 31, 2016,
and 2015, respectively, and were included as general and administrative expenses in the accompanying consolidated statement of
operations.
Included in professional fees were consulting
fees paid to a related party as a condition to the TCS 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. $116,100 and $73,000 in professional
fees were paid under these 3 agreements for the three months ended December 31, 2016 and December 31, 2015, respectively.
The Company has issued 100,000 common shares
issued subsequent to December 31, 2016 for $100,000, along with these common stock sales the Company has issued 50,000 warrants
exercisable for $68,750.
Item 2. 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 “Risk Factors” below.
Plan of Operations
Financial Gravity Companies, Inc. (“Financial Gravity”,
“We” or the “Company”)
, 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, and financial advisory firms. In fiscal year 2015 the
Company acquired two firms: Cloud9 Holdings Company (and its subsidiary Cloud9b2b) which was renamed Financial Gravity Business
and Sash Corporation, doing business as Metro Data Processing (a Tulsa, OK payroll processor). In fiscal year 2016 the Company
acquired Tax Coach Software LLC. 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, and 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 the 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 taxes 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: and (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 a P/L or Balance Sheet and even when they can, the data is often 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, as asking CPA’s to produce unique data to each client is outside the factory mentality of the
profession. 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 the management of 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 Department of
Labor’s Fiduciary Rule is a new ruling, scheduled to be phased in April 10, 2017 – Jan. 1, 2018, that will automatically
elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary,
bound legally and ethically to meet the standards of that status. While the status of this 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. 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, our status as an RIA
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 where we have the most experience and then roll out the service offering
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 401(k) plan.
To broaden the skillset
of CPAs, we have created the Certified Tax Master® designation and partner program for CPA’s and Enrolled Agents (“EA’s”).
We expect to roll out this program in early 2017. To our knowledge, there is no program offering like this of its kind available
elsewhere. This program was created in Financial Gravity Business, but will be sold and build revenue in the Tax Coach Software
platform.
Financial Gravity Ventures
This entity in our corporate
family 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 acquisition 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 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, based in Tulsa, OK was the Company’s first acquisition. 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™, and Certified Business Strategist™ offerings,
allowing financial professionals in our Partner Program to add additional value to their clients and their business.
Over the past few years
the Company has undertaken significant effort, and invested considerable capital, 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 quarter ended December 31, 2016
compared to the quarter ended December 31, 2015
Revenues
For the quarter ended December 31, 2016, revenue
increased $145,703 or 23.2% to $772,996 from $627,983 for the quarter ended December 31, 2015. The increase in revenue reflects
increase in service income, primarily due to significant growth in partner programs, which resulted in an increase in customer
sales. Revenues from Financial Gravity Tax alone increased by more than 31%.
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 decreased $72,673 or 21.2% to $270,093 for the quarter ended December 31, 2016 from $342,766
for the quarter ended December 31, 2015. This decrease is primarily due to the expense in 2015 of $50,000 of forfeited earnest
money from an acquisition that was not closed.
Depreciation and amortization expenses include
depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $14,489
to $24,677 for the quarter ended December 31, 2016 from $39,166 for the quarter ended December 31, 2015. The decrease is primarily
due to the fact that the Tax Coach Software prospect list was fully amortized by September 30, 2016.
General and administrative expenses increased
$62,836 or 106.5% to $121,826 for the quarter ended December 31, 2016 from $58,990 for the quarter ended December 31, 2015. The
increase is primarily due to an increase in costs associated with the growth of the partner program.
Management fees – related party expenses
decreased $10,333 or 16.3% to $53,000 for the quarter ended December 31, 2016 from $63,333 for the quarter ended December 31, 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 includes (but are not limited to) the provision of weekly podcasts, radio interviews, public speaking,
conference contribution, biweekly blogs, content for the newsletters, and other services. The variance is primarily because an
additional $10,000 in fees were paid during the quarter ended December 31, 2015.
Marketing expenses decreased $13,622 or 11.8%
to $101,878 for the quarter ended December 31, 2016 from $115,500 for the quarter ended December 31, 2015. Marketing activity remained
relatively stable from first quarter of fiscal 2016 to first quarter of fiscal 2017.
Salaries and wages expenses decreased $37,510
or 9.0% to $377,720 for the quarter ended December 31, 2016 from $415,230 for the quarter ended December 31, 2015. Salaries and
wages remained relatively stable from first quarter of fiscal 2016 to first quarter of fiscal 2017.
The Company experienced an increase in its
bottom line of $219,310 or 51.3% to a net loss of $208,267 for the quarter ended December 31, 2016 from a net loss of $427,577
for the quarter ended December 31, 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 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 December
31, 2016, the Company had cash and cash equivalents of $414,130. The increase of $281,327 in cash and cash equivalents from December
31, 2015 was due to net cash used in operating activities of $156,576, offset by net cash provided by financing activities of
$437,903.
Net cash used in operating activities was
$156,576 for the three months ended December 31, 2016, compared to $375,381 net cash used in operating activities for the three
months ended December 31, 2015. The net cash used in operating activities for the quarter ended December 31, 2016 was due to net
loss of $208,267, adjusted primarily by the following: (1) increases in depreciation and amortization of $24,677, accounts receivable
– related party of $2,303, accounts payable – trade of $9,374, accrued expenses of $4,903, and deferred revenue of
$18,976, (2) offset by decreases in trade accounts receivable of $7,963.
Net cash provided by financing activities was
$437,903 for the three months ended December 31, 2016, compared to net cash provided by financing activities of $199,391 for the
three months ended December 31, 2015. Financing activities for the three months ended December 31, 2016 consisted primarily of
$350,000 in proceeds from sales of common stock, and $100,000 in borrowings from the line of credit.
As shown below, at December 31, 2016, our contractual
cash obligations totaled approximately $337,070, all of which consisted of operating lease obligations and debt principal.
|
|
Payments due by period
|
|
Contractual obligations
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
Total
|
|
Line of credit
|
|
$
|
19,198
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
19,198
|
|
Notes payable
|
|
|
181,834
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
181,834
|
|
Operating leases
|
|
|
61,938
|
|
|
|
74,100
|
|
|
|
–
|
|
|
|
–
|
|
|
|
136,038
|
|
Total contractual cash obligations
|
|
$
|
262,970
|
|
|
$
|
74,100
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
337,070
|
|
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 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.