Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended June 30, 2020

 

OR

 

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Financial Gravity Companies, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada	001-34770	20-4057712
(State or other jurisdiction of incorporation or organization)	(Commission File No.)	(IRS Employee Identification No.)

 

12600 Hill Country Blvd Suite R-275, Bee Cave, TX 78738

(Address of Principal Executive Offices)

 

800-588-3893

(Issuer Telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class	Trading Symbol	Name of each exchange on which registered
N/A		N/A

 

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 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 such files). Yes [X] No [_]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer [_]	Accelerated filer [_]
	Non-accelerated filer [X]	Smaller reporting company [X]
	Emerging growth company [_]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes [_] No [X]

 

The number of shares outstanding of the registrant’s Common Stock as of August 27, 2020 was 83,023,048.

 

 

 

 

FINANCIAL GRAVITY COMPANIES, INC.
FORM 10-Q

 

TABLE OF CONTENTS

 

Part I
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2020 (unaudited) and September 30, 2019	3
	Consolidated Statements of Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2020 and 2019	4
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited), for the nine months ended June 30, 2020 and the nine months ended June 30, 2019.	5
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 2020 and 2019	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
Part II
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
SIGNATURES		28

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements

 

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

 

ASSETS		June 30, 2020 (Unaudited)				September 30, 2019
CURRENT ASSETS
Cash and cash equivalents		$	629,322			$	36,053
Trade accounts receivable, net			81,000				147,377
Prepaid expenses and other current assets			315,901				12,010
Total current assets			1,026,223				195,440
OTHER ASSETS
Property and equipment, net			88,452				139,990
Right to use lease asset			382,404				–
Customer relationship, net			–				–
Proprietary content, net			213,412				262,550
Non-compete agreements, net			1,322				5,260
Intellectual property			53,170				53,171
Goodwill			8,452,752				1,094,702
TOTAL ASSETS		$	10,217,734			$	1,751,113
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable – trade		$	67,948			$	174,749
Related party payables			84,801				–
Accrued expenses and other current liabilities			1,134,582				146,872
Contract liabilities			70,070				94,733
Line of credit			58,985				63,919
Lease Liability			382,404
Notes payable			6,136				13,393
Total current liabilities			1,804,925				493,666
Notes payable - net of current			679,942				23,534
Lease liability - non-current			–				–
Total non-current liabilities			679,942				23,534
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; 300,000,000 shares authorized; 83,023,048 shares issued and outstanding as of June 30, 2020 and 41,436,033 shares issued and outstanding as of September 30, 2019			83,023				41,436
Additional paid-in capital			14,286,471				7,391,592
Accumulated deficit			(6,636,626	)			(6,199,115	)
Total stockholders’ equity			7,732,868				1,233,913
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	10,217,734			$	1,751,113

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

Financial Gravity Companies, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

 

		For the Three Months Ended				For the Three Months Ended				For the Nine Months Ended				For the Nine Months Ended
		June 30,				June 30				June 30,				June 30,
		2020				2019				2020				2019
Total Revenue
Investment Management Fee		$	581,430			$	455,705			$	1,329,146			$	1,337,414
Service Income			366,061				470,836				920,433				1,749,649
Total Revenue			947,491				926,541				2,249,580				3,087,063
Operating Expenses
Cost of services			17,659				15,473				44,317				44,783
Professional services			61,681				119,205				243,881				278,998
Depreciation and amortization			38,636				30,235				86,443				158,835
General and administrative			168,084				139,220				348,158				410,863
Management fees - related party			–				43,500				–				130,500
Marketing			56,865				48,330				90,999				109,945
Compensation Expense			867,330				503,224				2,014,413				2,351,991
Total Operating Expenses			1,210,254				899,187				2,828,211				3,485,915
Operating Income (Loss)			(262,763	)			27,354				(578,631	)			(398,852	)
Other Income (Expense)			(20,747	)							129,253
Interest & Other Expense			12,341				(44,295	)			11,867				(137,686	)
Net Loss		$	(271,170	)		$	(16,941	)		$	(437,512	)		$	(536,538	)
Loss Per Share - Basic and Diluted		$	(0.01	)		$	(0.01	)		$	(0.01	)		$	(0.01	)

(1) Earnings per share amount is rounded up to $(0.01)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

 

 

		Number of Shares Issued and Outstanding				Common Stock Par Value Amount				Additional Paid-In-Capital				Accumulated Deficit				Total
Balance at September 30, 2018			35,837,900			$	35,838			$	5,986,052			$	(5,575,630	)		$	446,260
Stock based employee compensation expense			2,000,000				2,000				315,464				–				317,464
Stock options in lieu of expenses			–				–				38,660				–				38,660
Debt exchanged for stock			5,598,133				5,598				1,002,066				–				1,007,664
Net loss			–				–				–				(536,538	)			(536,538	)
Balance at June 30, 2019			43,436,033				43,436				7,342,242				(6,112,168	)			1,273,510
Balance at March 31, 2019			36,337,900			$	36,338			$	6,182,896			$	(6,095,901	)		$	123,333
Stock based employee compensation expense			1,550,000				1,500				118,620				–				120,120
Stock options in lieu of expenses			–				–				38,660				–				38,660
Debt exchanged for stock			5,598,133				5,598				1,002,066				–				1,007,664
Net loss			–				–				–				(16,267	)			(16,267	)
Balance at June 30, 2019			43,486,033			$	43,436			$	7,342,242			$	(6,112,168	)		$	1,273,510
Balance at September 30, 2019			41,436,033			$	41,436			$	7,391,592			$	(6,199,115	)		$	1,233,913
Stock based employee compensation expense			–				–				36,147				–				36,147
Stock options exercised			12,799				13				170				–				183
Private Placement stock issue			75,757				76				24,924				–				25,000
Stock issued in exchange for services			382,932				383				49,617				–				50,000
Forta acquisition			41,115,527				41,115				6,784,021				–				6,825,136
Net loss			–				–				–				(437,512	)			(437,512	)
Balance at June 30, 2020			83,023,048			$	83,023			$	14,286,471			$	(6,636,627	)		$	7,732,867
Balance at March 31, 2020			41,524,589			$	41,525			$	7,425,269			$	(6,365,456	)		$	1,101,337
Stock based employee compensation expense			–				–				27,564				–				27,564
Stock issued in exchange for services			382,932				383				49,617				–				50,000
Forta acquisition			41,115,527				41,115				6,784,021				–				6,825,136
Net loss			–				–				–				(271,170	)			(271,170	)
Balance at June 30, 2020			83,023,048			$	83,023			$	14,286,471			$	(6,636,626	)		$	7,732,867

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months Ended June 30, 2020 and 2019

(Unaudited)

 

 

		Nine Months Ended				Nine Months Ended
		June 30,2020				June 30,2019
Cash flows from operating activities:
Net Loss		$	(437,512	)		$	(536,538	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			86,443				89,535
Stock based compensation			12,228				317,464
Stock options issued for services			50,000				38,660
Impairment of intangible			–				69,300
Changes in operating assets and liabilities
Accounts receivable			87,259				4,823
Accounts receivable - related party			–				1,791
Prepaid expenses and other current assets			(168,835	)			10,577
Accounts payable - trade, current			(40,215	)			84,194
Accrued expenses and other liabilities			27,454				(80,770	)
Contract Liabilities			(24,664	)			–
Net cash used in operating activities			(407,842	)			(964	)
Cash flows from investing activities:
Cash acquired from Forta acquisition			710,154				–
Purchases of property and equipment			(829	)			(28,352	)
Purchase of trademark			–				(4,230	)
Net cash used in investing activities			709,325				(32,582	)
Cash flows from financing activities
Borrowings from line of credit			–				14,100
Borrowings from notes payable			283,614				202,205
Payments on line of credit			(4,935	)			(6,742	)
Payments on notes payable			(11,893	)			(172,362	)
Proceeds from sale of common stock			25,000				–
Net cash provided by financing activities			291,786				37,201
Net increase(decrease) in cash and cash equivalents			593,269				3,655
Cash and cash equivalents at beginning of period			36,053				32,220
Cash and cash equivalents at end of period		$	629,322			$	35,875
Cash Paid for Interest		$	5,624			$	86,778

 

The accompanying notes are an 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. is a parent company of financial services companies including brokerage, investment advisor, asset management, estate planning, family office services, business and personal tax planning, business consulting, and financial advisor services. Financial Gravity's mission is to bring together financial services companies that create comprehensive customer service synergies for the clients that we serve.

 

Financial Gravity Companies, Inc., and subsidiaries (the “Company”) is headquartered in Austin Texas, with locations in Allen, Texas, Denver, Colorado and Cincinnati, Ohio. The currently operating wholly owned subsidiaries of the organization include:

 

Sofos Investments, Inc. (“Sofos”, formerly, Financial Gravity Wealth, Inc.). Sofos is a registered investment advisor (“RIA”), registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses, including money management, financial planning, and wealth management.

 

Tax Master Network, LLC, runs the Tax Master Network® (“TMN”) that provides four primary services including monthly subscriptions to the TMN systems, coaching and marketing services. TMN currently supports over 300 Certified Public Accountants (“CPA”) and Enrolled Agent professionals, training them to support clients through tax planning services. TMN has developed the Certified Tax Master® that includes client acquisition and retention systems. TMN also offers tax planning services through the Tax Blueprint®, which includes an extensive individualized review and assessment of the client’s tax situation. The initial assessment sets the requirements for a custom Tax Blueprint® for each client to use as guide to implementation of the identified tax savings strategies. Finally, TMN offers the Tax Operating System, which is a system for integrating and executing tax planning strategies.

 

MPath Advisor Resources, LLC (formerly Financial Gravity Business, LLC.) (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.

 

Forta Financial Group, Inc. (“Forta”) is a broker-dealer, a registered investment advisor, and a licensed insurance agent. It primarily operates in Colorado and has independent advisors and representative in other states.

 

SEGMENT REPORTING

 

We manage our business in four reportable segments. Each of our subsidiaries is treated as a segment. We evaluate the performance of our operating segments based on a segment’s share of consolidated operating income, which excludes discontinued operations of Financial Gravity Tax that are shown in the report.

 

 

 

 

 

 

 

		Financial Gravity Tax (discontinued)				Forta Financial Group				MPath				Sofos Investments				Tax Masters Network				Unallocated (Financial Gravity Companies, Inc.)				TOTAL
Ordinary Income
Total Service Income		$	69,721			$	57,346			$	30,133			$	39,545			$	726,950			$	(3,263	)		$	920,433
Total Investment Management Fees			0				349,187				0				979,959				0				0				1,329,146
Total Income			69,721				406,533				30,133				1,019,505				726,950				(3,263	)			2,249,580
Gross Profit			69,721				406,533				30,133				1,019,505				726,950				(3,263	)			2,249,580
Expense																							0
Total Compensation Expense			(78	)			261,426				1,972				385,095				245,186				1,120,812				2,014,413
Total Cost of services			4,410				11,007				0				0				28,899				0				44,317
Total Depreciation & Amortization			0				0				0				0				14,350				72,094				86,443
Total General and Administrative			1,620				82,884				2,655				25,225				23,772				212,002				348,158
Total Marketing			2,411				7,414				0				20,158				6,117				54,899				90,999
Total Professional Services			0				27,171				0				897				2,997				212,815				243,881
Total Expense			8,363				389,903				4,627				431,375				321,320				1,672,622				2,828,211
Net Ordinary Income			61,358				16,631				25,506				588,130				405,630				(1,675,885	)			(578,631	)
Other Income/Expense
Total Other Income			0				0				0				0				0				129,253				129,253
Total Other Expense			0				(14,123	)			0				(46	)			(55	)			2,357				(11,867	)
Net Other Income			0				14,123				0				46				55				126,895				141,119
Net Income		$	61,358			$	30,754			$	25,506			$	588,176			$	405,685			$	(1,548,990	)		$	(437,512	)

 

BUSINESS ACQUISITION

 

On September 30, 2019, the Company entered into a merger agreement with Forta Financial Group, Inc. (“Forta” or “FFGI”, formerly, Presidential Brokerage, Inc.), to acquire 100% of the stock of Forta in exchange for 45,785,879 shares of Company common stock. Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation. The acquisition transaction closed on May 21, 2020. Forta’s financial performance is included in Company’s consolidated statements starting as of May 21, 2020.

 

 

 

 

Identification of Company as the Acquirer

 

The acquisition was primarily effected by a merger and an exchange of Company’s common stock as the consideration paid to Forta stockholders by Company for their equity interests in Forta. We looked at all pertinent facts and circumstances identified in ASC 805-10-25-1, ASC 805-10-05-4 to be considered in identifying the acquirer in a business combination effected by exchanging equity interests. The standard recognizes that the acquirer usually is the entity that issues its equity interests, but that in some business combinations the issuing entity is the acquiree. In these situations, the accounting acquiror is different than the legal acquiror.

 

The guidance provides the following factors to consider in identifying the accounting acquiror in a business combination like the acquisition that is effected by exchanging equity interests:

 

The majority shares ended up being held by Forta shareholders. The original calculation was to be an even 50% for Forta and Company shareholders. However, the calculations included shares that were granted through the option plan at Company, and it was assumed that each of the option share grants would be exercised. As it turned out, the vast majority of the option shares were not exercised, so that ended up skewing the majority calculation in favor of the Forta shareholders. There were no other special or unusual voting arrangements, convertible securities or other financial instruments of the combined Company immediately after the acquisition.

 

After the acquisition, the largest single minority interest would be held by a Company shareholder, John Pollock, and members of the Board of Directors and management of Company, some of whom were shareholders of Forta, would end up owning in excess of 40% of the voting shares of Company.

 

There is no agreement on the election of Board members, and neither Forta nor Financial Gravity shareholders have any agreement to elect a majority of the Board. The factor is neutral.

 

The composition of the senior management of the combined entity. Senior management is from Financial Gravity. Based upon the above, the Company has concluded that Financial Gravity will be treated as the acquirer.

 

Purchase Price Allocation

 

The purchase price of $7,600,415 was based upon the share price of Company’s stock as of May 21, 2020. We have used preliminary fair value estimates for the assets acquired and liabilities assumed for the acquisition. We believe significant synergies may arise from this acquisition, as a result of which the purchase price was in excess of the fair value of the net assets acquired and, as a result, we have preliminarily recorded goodwill of $7,358,050. We have not yet finalized estimates that relate to certain tangible and intangible assets, including customer relationships, trade names, contracts. Our estimates and assumptions for these acquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods (up to one year from the acquisition date).

 

 

 

 

 

Assets Acquired and Liabilities Assumed

 

Forta Financial Group, Inc.

Assets Acquired and Liabilities Assumed

As of May 21, 2020

 

PURCHASE PRICE			7,600,415
ASSETS
Current Assets
Cash			710,154
Accounts Receivable			20,882
Other Current Assets			135,056
Total Current Assets			866,093
Other Assets			582,330
TOTAL ASSETS			1,448,423
LIABILITIES
Liabilities
Current Liabilities
Total Accounts Payable			18,215
Total Other Current Liabilities			739,579
Total Current Liabilities			757,793
Long-Term Liabilities
Total Long-Term Liabilities			448,265
Total Liabilities		$	1,206,058
Goodwill		$	7,358,050

 

The accompanying unaudited pro forma condensed combined financial statement of Financial Gravity Companies, Inc. (“Financial Gravity”, “FGCO” or the “Company”) is presented to illustrate the estimated effects of the acquisition of 100% of the stock of Forta Financial Group, Inc. (“Forta” or “FFGI”), which closed on May 21, 2020 (the “acquisition” or the “transaction”) on the historical financial position and results of operations of the Company. The unaudited pro forma condensed combined statement of operations is based upon and derived from and should be read in conjunction with Company’s and Forta’s historical audited financial statements for the year ended September 30, 2019 and the historical unaudited financial statements for the nine months ended June 30, 2020 – Company will be fling its 8K/A with the financial information.

 

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

Forta’s results of operations have been included in the following financial statement for the nine months ending June 30, 2020 prospectively from the assumed date of acquisition of October 1, 2019. Pro forma results have been prepared by adjusting historical results to include Forta’s results of operations. The unaudited pro forma results presented do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of October 1, 2019, nor does it indicate the results of operations in future periods. Additionally, the unaudited pro forma results do not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions on revenues, reduction of expenses, asset dispositions, or other factors. The impact of these items could alter the following pro forma results:

  

 

 

 

 

FINANCIAL GRAVITY COMPANIES, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED JUNE 30, 2020

 

 

		Forta				Financial Gravity				Combined
		(A)				(B)
Income
Investment Management Fees			3,108,246				859,754				3,968,000
Service Income			–				979,959				979,959
Total Revenue			3,108,246				1,839,713				4,947,959
Gross Profit			3,108,246				1,839,713				4,947,959
Expense
Compensation Expense			1,695,484				1,752,987				3,448,471
Cost of services			139,847				33,309				173,156
Depreciation & Amortization			4,900				86,443				91,343
General and Administrative			906,878				265,749				1,172,627
Marketing			89,168				84,036				173,204
Professional Services			237,364				216,709				454,073
Total Expense			3,073,644				2,439,233				5,512,877
Net Ordinary Income			34,601				(599,521	)			(564,920	)
Other Income/Expense			–				135,919				135,919
Total Other Income			–				135,919				135,919
Total Other Expense			–				(5,030	)			(5,030	)
Net Other Income			–				130,889				130,889
Net Income			34,601				(468,632	)			(434,031	)
Net income (loss) per common share:			–				–				–

 

A	Derived from the unaudited statement operations of Forta for the nine months ended June 30, 2020
B	Derived from the unaudited statement operations of FGCO for the nine months ended June 30, 2020

 

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting polices consistently applied in the preparation of the accompanying consolidated financial statements 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 its subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation.

 

Effective May 21, 2020, Company acquired 100% of Forta in exchange for 45,785,879 shares of common stock of Company. Forta’s assets and liabilities are included in Company’s assets and liabilities as of June 30, 2020. Forta’s results of operations have been consolidated with Company’s results beginning as of June 1, 2020.

 

 

 

 

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 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.

 

Receivables

 

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. The allowance for doubtful accounts was $0 as of June 30, 2020 and September 30, 2019, respectively.

 

In the normal course of business, the Company may extend credit to its customers, on an unsecured basis, substantially all of whom are 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.

 

Leases

 

In February 2016, the FASB issued ASU 2016-02 Leases, which changed financial reporting as it relates to leasing transactions to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. In July 2018, the FASB issued ASU No. 2018-10 Codification Improvements to Topic 842, Leases and ASU No. 2018-11 Leases (Topic 842): Targeted Improvements. In March 2019, the FASB issued ASU No. 2019-1 Codification Improvements to Topic 842, Leases. The Company adopted these ASUs on October 1, 2019 on a modified retrospective basis. The Company did not elect the hindsight practical expedient and did elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases. The initial adoption of the standard recognized right-of-use assets of $323,097 and lease liabilities of $337,454 on the Company’s statement of financial position with no impact on the Company's results of operations. The Company had no significant changes to processes or controls.

 

The Company leases their office space through an operating lease in Denver Colorado, which expires at May 31, 2021, and non-material offices leases in Cincinnati, Ohio and Loveland, Colorado. Company’s lease agreements obligate the Company to pay real estate taxes, insurance, and certain maintenance costs, which are accounted for separately. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term. Lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses.

 

 

 

 

Proprietary Content

 

The proprietary content acquired as a part of the TMN 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. The proprietary content is being amortized on a straight-line basis over an eight-year estimated life. During each of the three months ended June 30, 2020 and 2019, and the nine months ended June 30, 2020 and 2019, the Company recorded amortization expense of $16,320 and $49,138 for 2020 and $16,410 and $49,228 for 2019, respectively, on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at June 30, 2020 was $311,688 and $246,140 at September 30, 2019.

 

Non-compete Agreements

 

Non-compete agreements entered into as a part of the TMN 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. 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 three and nine months ended June 30, 2020 and 2019, the Company recorded amortization expense of $1,308 and $3,938 for 2020 and $1,315 and $3,945 for 2019, respectively on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at June 30, 2020 was $24,978 and $19,725 at September 30, 2019.

 

Intellectual Property

 

Intellectual property is stated at cost. Intellectual property with indefinite lives are not amortized but are tested for impairment at least annually. Management has determined that the intellectual property have an indefinite life and do not consider the value of intellectual property recorded in the accompanying consolidated balance sheets to be impaired as of June 30, 2020 and September 30, 2019.

 

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 pertinent factors to determine whether it is more likely than not that the fair value of a reporting unit is less than it is 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 it is 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 it carries value. Management does not consider the value of goodwill recorded for TMN in the accompanying consolidated balance sheets to be impaired as of June 30, 2020 and September 30, 2019. Goodwill related to the acquisition of Forta was recognized in the amount of $7,358,050, being the difference between the value of Forta’s net assets and the market value of Company’s stock at the time of the acquisition of Forta.

 

Income Taxes

 

The Company records federal and state income, 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, penalties or uncertain tax positions as of June 30, 2020 and September 30, 2019.

 

 

 

 

 

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 2016 are still subject for examination by taxing authorities.

 

Earnings Per Share

 

Basic loss 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. The average number of common shares for the three months ended June 30, 2020 and 2019 respectively were 72,018,838 and 38,993,226. The average number of common shares for the nine months ended June 30, 2020 and 2019, respectively, were 51,669,659 and 36,949,650. For the three and nine months ended June 30, 2020, 1,351,323 approximately common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. For the three and nine months ended June 30, 2019, approximately 3,430,646 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive.

 

Revenue Recognition

 

The Company derives its revenues primarily from: investment management fees, brokerage commissions, TMN subscriptions, financial advisor subscriptions, Tax BluePrint sales, insurance sales and marketing programs, and Tax Operating System subscriptions.

 

Company generates investment management fees by providing management services for client investments (through Sofos and Forta). Investment management fees are calculated as a percentage of assets under management for the period. Investment management fees Revenue is recognized as earned, at the end of each month that management services were performed. Fees are withdrawn from investor accounts monthly, in arrears, or in the case of Forta, investment management fees may be withdrawn quarterly in advance from investor accounts. These advance payments are recognized, equally, over the three months of the applicable quarter.

 

Company generates brokerage commissions through Forta by providing brokerage services to clients. Commissions are calculated based upon the value of the securities that are bought or sold for the client. Fees are paid as part of the purchase and sale transaction. Depending upon the securities bought or sold, recognition is either on the trade date or the date when the purchase contract is accepted.

 

Revenue is also derived from the sale of annuities and premiums on life insurance policies issued by insurance companies to clients (through Forta), and from insurance marketing programs (through MPath Advisor Resources, LLC.). The revenue is recognized after the insurance policies are issued and in force.

 

Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as Contract Liabilities in the accompanying consolidated balance sheets.

 

TMN provides several levels of subscription services that are charged and collected on a month to month basis. The client subscribers are tax advisors that provide tax advice to their customers. None of these services comes with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Subscription income is billed to client credit cards monthly, on the monthly anniversary of client sign-up. Cancellations are processed within the month requested and subscriptions 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. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are customized tax plans to save clients’ customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings, up to $10,000. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Tax Blueprint® sales are billed to the client after a preliminary assessment and client approval to move forward.

 

 

 

 

 

Advertising and Marketing

 

Advertising and marketing costs are charged to operations when incurred.

 

Stock-Based Compensation

 

The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations for employee grants, commissions for non-employee grants, and stock appreciation rights grants, on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rate of 0.59% in the quarter ended June 30, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 7 years and volatility of 100% in 2020 and volatility of 35% to 40% in 2019.

 

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

 

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended September 30, 2019, included in its Annual Report on Form 10-K/A.

 

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.

 

On May 8, 2020, the Company received a Paycheck Protection Program (“PPP”) loan in the amount of $283,345. Additionally, on May 15, 2020, Forta received a PPP loan in the amount of $377,700. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loans will be eligible for forgiveness, which would result in an increase in capital of $661,045.

 

 

 

 

 

On May 23, 2017, the Company and GHS Investments, LLC (“GHS Investments”) entered into an Equity Financing Agreement (the “Agreement”). The Agreement was filed as an exhibit to a registration statement on Form S-1, filed with the Securities and Exchange Commission on September 18, 2017. The Agreement will terminate (i) when GHS Investments has purchased an aggregate of $11,000,000 of the common stock of the Company, or (ii) 36 months after the effective date of the Agreement, or (iii) at such time that the registration statement is no longer in effect. Company has not had to use this as a source of funding and expects it to expire with no impact on the Company’s operations.

 

Management, in the ordinary course of business, will pursue raising 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 June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses, which amends how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, which applies to trade accounts receivable and the calculation of the allowance for uncollectible accounts receivable. The new standard will become effective for the Company for fiscal years beginning after December 31, 2019, with early adoption permitted. In November of 2019, the FASB issued ASU 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which deferred the effective date of ASU Topic No. 2016-13 to fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements. Since the Company currently uses an expected loss from customers method, the Company does not anticipate the adoption of ASU 2016-13 will have a material impact on the Company's financial condition or results of operations.

  

In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new guidance is effective for the Company beginning October 1, 2020. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on the Company's financial condition or results of operations.

 

2.	PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at June 30, 2020 and September 30, 2019:

 

		Estimated Service Lives		30-Jun-20				30-Sep-19
Furniture, fixtures and equipment		2 - 5 years		$	405,268			$	93,073
Internally developed software		10 years			152,000				152,000
					557,268				245,073
Less accumulated depreciation and amortization depreciation					(468,816	)			(105,083	)
				$	88,452	*		$	139,990

* The value of the assets has not been finalized and may be adjusted based upon purchase price allocations.

 

 

 

 

 

Depreciation expense was $21,009 and $9,967 during the three months ended June 30, 2020 and June 30, 2019, respectively, and $33,367 and $27,943 during the nine months ended June 30, 2020 and June 30, 2019, respectively.

 

3.	INTELLECTUAL PROPERTY

 

Intellectual property consists of the following:

 

Intellectual property at September 30, 2018		$	48,940
Intellectual property purchased at cost			4,230
Intellectual property at September 30, 2019			53,170
Intellectual property purchased at cost			–
Intellectual property at June 30, 2020		$	53,170

 

4.

LEASES

 

The Company has traditionally conducted some of its operations from leased premises.

 

On June 16, 2020, the Company entered into a lease termination agreement with its landlord on the premises located in Allen, Texas. The landlord accepted termination of the lease, and Company’s remaining obligation is limited to issuing shares of its common stock if the landlord’s efforts to re-lease the premises results in a loss, but not to exceed $66,000. The Company leases premises in Denver Colorado. The Denver ends on May 31, 2021, and Company will be leasing other space at the end of the term. The remaining lease obligations is $349,473. In addition, the Company has small locations in Allen, Texas, Austin, Texas and Cincinnati, Ohio.

 

The undiscounted annual future minimum lease payments consist of the following at:

 

		June 30,2020
2020			108,030
2021			288,640
Total lease payments			396,670
Interest			(14,266	)
Present value of lease liabilities			382,404

 

 

5.	LINE OF CREDIT

 

The Company has a revolving line of credit with Wells Fargo Bank, N.A. in the amount of $67,500. 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 9.5%. This line of credit is supported by the personal guarantee of John Pollock. Line of credit balance was $58,985 and $67,005 at June 30, 2020 and September 30, 2019, respectively.

 

6.	NOTES PAYABLE

 

On April 19, 2019, the Company entered into a Promissory Note Payable with Charles O’Banon (“O’Banon”), a customer, in the amount of $32,205. The note is in settlement of tax penalties and interest he incurred, that were proximately caused by the Company’s actions. The monthly principal and interest payments are $623, with a balloon payment of $14,048 in April 2022. The note is being repaid over 36 months and bears an interest rate of 6%. The outstanding balance on June 30, 2020 and September 30, 2019 was $26,511, and $29,401 respectively.

 

 

 

 

 

The Company entered into and received a Paycheck Protection Program (“PPP”) loan in the amount of $283,345 on May 8, 2020. Additionally, on May 15, 2020, Forta received a PPP loan in the amount of $377,700. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loans will be eligible for forgiveness, which would result in an increase in capital of $661,045.

 

On April 12, 2019, the Company entered into a loan agreement with John Pollock, Executive Vice President of the Company. The note bears interest at 2.76% and is due on December 1, 2020. See Related Party Transactions.

  

The Company’s maturities of debt subsequent to June 30, 2020 are as follows:

 

2020		$	1500
2021			6,229
2022			678,350
			686,078

 

7.	ACCRUED EXPENSES

 

Accrued expenses increased by $230,699 for the nine months ending June 30, 2020, to $358,994 from $128,295 as of September 30, 2019, due to inclusion of Forta’s advisor commission accruals ($86,879) that are paid with payroll on the 15^th of the following month, taxes ($25,072), accrued vacation pay ($42,808), stock appreciation rights liability ($41,703), and credit card balances ($17,555).

  

8.	INCOME TAXES

 

For the three and nine months ended June 30, 2020 and 2019, 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, changes in the federal statutory rate are from 35% to 21%, 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 June 30, 2020 and September 30, 2019:

 

		30-Jun-20				30-Sep-19
Net non-current deferred tax assets:
Net operating loss carry-forward		$	1,405,065			$	1,098,314
Property and equipment			3,456				3,456
Total			1,408,521				1,101,770
Net non-current deferred tax liabilities:
Intangible assets			7,996				7,996
Net			1,400,525				1,093,774
Less valuation allowance			(1,400,525	)			(1,093,774
Net deferred taxes		$	–			$	–

 

 

 

 

 

9.

COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

 

Legal Proceedings

 

From time to time, we are a party to or are otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. Management believes the legal proceedings that the Company is involved in are immaterial to our ability to operate or market our services, our consolidated financial position, results of operations or cash flows.

 

10.	STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company is authorized to issue up to 300,000,000 shares of common stock, par value $0.001 per share.

 

During the nine months ended June 30, 2020 and 2019, the Company sold 75,757 shares and 0 shares, respectively, for $25,000 and $0, respectively.

 

11.	STOCK OPTION PLAN

 

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, 2018.

 

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 and stock appreciation rights (SARs). 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 and stock appreciation rights 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, 2018			3,631,562			$	417,245				0.58			94 months
Granted			2,269,650				472,048				0.21			107 months
Exercised			–				–				–
Canceled or expired			3,112,712				338,838				0.24
Outstanding - September 30, 2019			2,788,500				550,455				0.29			96 months
Granted			5,350,000				1,461,200				0.16			118 months
Exercised			(12,799	)			(770	)			0.06
Canceled or expired			(1,248,429	)			(1,392,472	)			1.12
Outstanding - June 30, 2020			6,877,272				618,413				0.16			105 months
Exercisable - June 30, 2020			1,505,899								0.29			79 months

 

 

 

 

 

Unamortized share-based compensation expense as of June 30, 2020 amounted to $424,496 which is expected to be recognized over the next 4.6685 years. 

 

Total compensation expense, included in salaries and wages, of previously unamortized stock compensation was $50,885 and $41,370 for the three ended June 30, 2020 and 2019, respectively, and $67,136 and $133,714 for the nine months ended June 30, 2020 and 2019, respectively.

 

On November 27, 2019, the 2016 Plan was amended to allow grants of other equity related rights, including Stock Appreciation Rights. During the three and nine months ended June 30, 2020, 500,000 and 5,350,000 options and SARs were granted, respectively. SARs are recorded as a liability because there is a cash settlement option.

 

12.	RELATED PARTY TRANSACTIONS

 

On May 21, 2020, the Company completed the purchase of 100% of the stock of Forta. As a result, Scott Winters, William Nelson, Jr., and Gary Nemer (a former board member) now own, in aggregate, in excess of 39% of the shares of stock of Company.

 

As a result of the acquisition of the TMN business in 2016, the Company is obligated to make payments to TaxTuneup, LLC, which is an entity owned by Edward A. Lyon (a current board member), each month totaling $16,500. The total paid under these agreements in the three months ended June 30, 2020 and 2019 respectively, were $49,500 and $49,500, and for the nine months ended June 30, 2020 and 2019 were $148,500 and $148,500.

 

On April 12, 2019, the Company entered into a loan agreement with John Pollock, Executive Vice President of the Company. The note bears interest at 2.76% and will be repaid in six equal installments of $2,520, beginning July 1, 2019. The balance of the loan at June 30, 2020 was $5,116 and at September 30, 2019 was $7,526.

 

On February 28, 2020 and March 5, 2020, the Board of Directions approved employment agreements that included employee stock options and stock appreciation rights to employees that are also Board members and related parties totaling 3,450,000 in grants.

 

13.	SUBSEQUENT EVENTS

 

On July 20, 2020, the Company issued to Gary Nemer 250,000 in employee stock options vesting over a three-year period and 500,000 in stock appreciation rights vesting over five years

 

On August 14, 2020, one of the advisors at Forta in Denver resigned to join a smaller firm. The departure will affect future headcount and revenue in the Denver office.

 

A total of 4,670,352 shares that will be issued to Forta shareholders have not yet been issued due to lack of shareholder paperwork. When issue, the total issued shares will be 87,693,400.

 

 

 

 

 

 

 

 

 

 

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 and Uncertainties” below.

 

Plan of Operations

 

Financial Gravity Companies, Inc. (“Financial Gravity”, “We” or the “Company”), based in Austin, Texas, was formed specifically to be the parent company of several subsidiaries that provide integrated tax, investment, business, and financial solutions. Financial Gravity’s clients include small businesses, small business owners and high and middle net worth individuals. The Company’s services are focused on helping clients make more money and build wealth, most often with investment advice, tax savings, lowering costs and improving efficiency. In addition to expanding through client procurement and organic growth, Financial Gravity intends to pursue acquisitions. The primary acquisition targets currently include investment marketing and financial advisory and broker dealer firms. The Company is actively identifying potential acquisition candidates to fuel more rapid growth.

 

Financial Gravity’s Subsidiaries and Reportable Segments:

 

The following outline briefly describes Financial Gravity’s active subsidiaries and the products and services they offer:

 

Sofos Investments, Inc. Sofos is a registered investment advisor (“RIA”), registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses, including financial planning, wealth management and money management.

 

Tax Master Network, LLC (“TMN”) through the Tax Master Network® provides monthly subscriptions services to the TMN systems, coaching and marketing services to over 300 Certified Public Accountants (“CPA”) and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. TMN’s tax planning services include the Tax Blueprint®, Certified Tax Master®, and the Tax Operating System.

 

MPath Advisor Resources, LLC (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.

 

Forta Financial Group, Inc. (“Forta”) Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation.

 

Growth comes from the following reportable segments:

 

Tax services and financial advisory services, including Tax Blueprint® and Tax Operating System® services through TMN. 

 

Brokerage and wealth management services through Forta and money management and investment advisory services through Sofos. Other products and services include insurance and other miscellaneous products and services.

 

Future growth is expected to come from these key areas, organic growth, acquisitions, and strategic alliances.

 

 

 

 

 

Results of Operations for the three and nine months ended June 30, 2020 compared to the three and nine months ended June 30, 2019

 

RESULTS OF OPERATIONS

 

As described in Notes to Consolidated Financial Statements, “Segment Reporting”, we evaluate the performance of our operating segments based on net income.

 

Revenues

 

For the three months ended June 30, 2020 revenues increased $20,950 to $947,491 from $926,541 for the three months ended June 30, 2019. For the nine months ended June 30, 2020, revenues decreased $837,483 to $2,249,580 from $3,087,063 for to the nine months ended June 30, 2019. The principal components of the variance in revenue for the three months and nine months included the decrease in revenue from the sale of Company’s tax and accounting subsidiary in the amount of $97,485 and $267,748, respectively; reduction in insurance sales of $77,263 and $343,144, respectively; reduction of investment management fees of $117,549 and $60,034, respectively; reduction of TMN membership revenue for the nine months in $247,204 through membership reduction, and reductions in other revenue generating activities of close to $150,000 in 2019. $417,142 in investment management revenue was generated by Forta in April through May 21, 2020 that is not reflected in the revenue during the three-month period because the acquisition of Forta is not included in revenue until May 21, 2020.

 

Operating Expenses

 

Cost of services increased by $2,187 to $17,659 for the quarter ended June 30, 2020 from $15,473 for the three months ended June 30, 2019, and decreased by $440, to $44,317 from $44,783 for the nine months ended June 30, 2020 and June 30, 2019, respectively. The variance in expenses for the three month and nine-month periods arises from decreased credit card processing fees due to disposal of the Financial Gravity Tax line of business.

 

Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses decreased $57,524 to $61,681 for the three months ended June 30, 2020 from $119,205 for the three months ended June 30, 2019. Professional services decreased $35,117 to $234,881 for the nine months ended June 30, 2020 from $278,998 for the nine months ended June 30, 2019. The variances are principally comprised of a decrease of $63,750 for the three months and $148,000 for the nine months, respectively, related to reclassing related party consulting fees to compensation, offset by costs of implementing new technology offerings.

 

Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses increased $8,401 to $38,636 for the three months ended June 30, 2020 from $30,235 for the three months ended June 30, 2019. The decrease is due to accelerating the depreciation of computers and software, reducing the useful lives over which they are depreciated to three year lives. Depreciation and amortization decreased $72,392 to $86,443 for the nine months ended June 30, 2020, from $158,835 for the nine months ended June 30, 2019. The principal difference is a charge to amortization for full impairment of Trademarks, $69,000.

 

General and administrative expenses increased $28,854 to $168,084 for the three months ended June 30, 2020 from $139,220 for the three months ended June 30, 2019. General and administrative expenses decreased $62,705 to $348,158 for the nine months ended June 30, 2020 from $410,863 for the nine months ended June 30, 2019. The variance in expenses for the three month and six-month periods related to Company discontinuing its tax and accounting subsidiary. Marketing expenses increased $8,504 to $56,865 for the three months ended June 30, 2020 from $48,330 for the three months ended June 30, 2019. Marketing expenses decreased $18,526 to $90,999 for the nine months ended June 30, 2020 from $109,945 for the nine months ended June 30, 2019. The variance in expenses for the three month and six-month periods from reflects a change in marketing efforts influenced by Covid 19 restrictions that shut down some previous marketing channels, while new channels are just starting to open up.

 

 

 

 

 

 

Compensation Expense expenses increased $364,106 to $867,330 for the three months ended June 30, 2020 from $503,224 for the three months ended June 30, 2019 and decreased $337,578 to $2,014,413 for the nine months ended June 30, 2020 from $2,351,991 for the nine months ended June 30, 2019. The increase for the three months ended June 30, 2020 was principally driven by Forta salaries ($85,000) and commissions ($86,000) being included in compensation. The decrease for the nine months was principally due to termination of advisors ($250,000) and decreases in stock-based compensation ($145,000).

 

The Company experienced an increase in its net loss of $254,299 to a net loss of $271,170 for the three months ended June 30, 2020 from a net loss of $16,941 for the three months ended June 30, 2019. The Company experienced a decrease in its net loss of $99,027 to a net loss of $437,512 for the nine months ended June 30, 2020 from a net loss of $536,538 for the nine months ended June 30, 2019. The variance in loss for the three months ended June 30, 2020 reflects the impact of the Covid-19 reduction in marketing and sales, which impacted revenue, and the reduction of non-recurring revenue from the sale of the tax unit ($150,000). The decrease in the net loss for the nine months was primarily due to the sale of the tax unit.

 

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. Certain revenue generated by Forta is paid quarterly, in advance, and recognized each month.

 

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 Contract liabilities in the accompanying consolidated balance sheets.

 

Tax Master Network has 5 levels of subscription services that are charged and collected on a month to month basis (Tax Master basic, advance, and elite membership, all-stars coaching, and networker). 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.

 

Accounts receivable are primarily generated from the TMN subscriptions (collected in advance), the sale of investment products and services (collected directly from the custodian or issuer), and of products related to tax planning (collected in advance). The accounts 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 may extend 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 0.59% in the quarter ending June 30, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 100% in 2020 and 35% to 40% in 2019.

 

Liquidity and Capital Resources

 

As of June 30, 2020, the Company had cash and cash equivalents of $629,322. The increase of $593,269 in cash and cash equivalents during the nine months ended June 30, 2020 was primarily due to net cash used in operating activities ($407,842), the purchase of Forta, ($332,454, net of Forta PPP loan), and the receipt of funding of the PPP loans, (Financial Gravity $283,345 and Forta $377,700). The aggregate PPP loans are expected to be forgiven.

 

As shown below, at June 30, 2020, our contractual cash obligations totaled approximately $466,402, which consisted of operating lease obligations and debt principal, excluding the PPP loan balances.

 

Payments due by period

 

Contractual obligations		Less than 1 year				1-3 years				4-5 years				Total
Notes payable		$	6,136			$	18,897			$	–			$	25,033
Lease liability			382,404				–				–				382,404
Line of Credit			58,985				–				–				58,985
Total contractual cash obligations (1)		$	447,525			$	18,897			$	–			$	466,422

 

(1)

This includes an estimate of $25,000 for shares issued to the Allen TX landlord pursuant to the termination agreement.

 

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

 

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.

 

On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Quarterly Report on Form 10-Q, COVID-19 has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue for an extended period, there could be a material and adverse financial impact to our results of operations. For more information about the risks associated with COVID-19, see Part II, “Item 1A. Risk Factors and Uncertainties” of this Quarterly Report on Form 10-Q.

 

 

 

 

Item 3. 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.

 

Stock Market Risk. Our investment advisory business is subject to stock market risks. Revenue is generally based upon a percentage of the value of assets under management. Stock market downturns can affect the value of assets under management and therefore affect revenue.

 

Item 4. Controls and Procedures

 

As of the end of the period covered by this report, our principal executive officer and principal financial officer, evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, we concluded that, as of the date of the evaluation, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding required disclosures. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

 

During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

 

 

 

 

 

 

 

Part II Other Information

 

Item 1A. RISK FACTORS AND UNCERTAINTIES.

 

No changes from September 30, 2019 10-K annual report other than:

 

In December 2019, a novel strain of coronavirus, referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to other countries, including the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Further, the President of the United States declared the COVID-19 pandemic a national emergency. States in which we operate declared states of emergency related to the spread of COVID-19 and issued executive orders directing individuals to stay at their place of residence for an indefinite period of time.

 

The financial markets demonstrated significant volatility in reaction to the virus outbreak. There has been considerable strain on companies in many sectors of the economy. Investors suffered significant decreases in the value of their investment portfolios, and the economy has significantly shut down. It is unclear when the economy will start up again, and the lingering effects are not known. During periods of high volatility and uncertainty many investors choose to stop ongoing investment activity and sit on the sidelines until the markets become more stable.

 

The Company’s revenues are adversely affected when investors reduce their investment activities. In addition, part of Company’s revenues is based upon the value of assets under management. If the investment portfolios of clients decrease in value, the fees charged for investment advice also decreases.

 

The Company could be affected by lack of access to its offices, although that seems to have had little short-term impact as employees have succeeded in maintaining productivity while working remotely. The long-term effects, however, may present significant issues.

 

Any significant shutdown of the economy for a sustained period will affect the Company’s revenue which could lead to losses.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

 

 

 

 

Item 6. Exhibits

 

31.1	Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2	Rule 13a-14(a) Certification of the Principal Financial Officer.
32	Section 1350 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: August 27, 2020	By: /s/ Scott Winters
	Scott Winters
	Chief Executive Officer
	(Principal Executive Officer)
Date: August 27, 2020	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/ Scott Winters		CEO, Chairman of the Board	August 27, 2020
Scott Winters		(principal executive officer)
/s/ Paul Williams		Vice Chairman, CFO	August 27, 2020
Paul Williams		(principal financial officer)
/s/ Edward A. Lyon		Director	August 27, 2020
Edward A. Lyon
/s/ John Pollock		Director	August 27, 2020
John Pollock
/s/ Jennifer Winters		Director	August 27, 2020
Jennifer Winters
/s/ William Nelson		Director	August 27, 2020
William Nelson, Jr.