Attached files
| file | filename |
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| EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, - Financial Gravity Companies, Inc. | fingravity_ex3201.htm |
| EX-31.2 - CERTIFICATION - Financial Gravity Companies, Inc. | fingravity_ex3102.htm |
| EX-31.1 - CERTIFICATION - Financial Gravity Companies, Inc. | fingravity_ex3101.htm |
| EX-14.1 - CODE OF ETHICS - Financial Gravity Companies, Inc. | fingravity_ex1401.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Financial Gravity Companies, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 001-34770 | 20-4057712 |
| (State or other jurisdiction of incorporation or organization) |
(Commission File No.) |
(IRS Employee Identification No.) |
800 N. Watters Rd., Suite 120, Allen, Texas 75013
(Address of Principal Executive Offices)
469-342-9100
(Issuer Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [_] No [X]
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [_]
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment of this Form 10-K. [X]
Large Accelerated Filer [_] Accelerated Filer [_] Non-Accelerated Filer [_] 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]
As of March 31, 2017, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the issuer was approximately $37,762,295 based on the last sales price of the issuer’s Common Stock, as reported by OTC Markets. This amount excludes the market value of all shares as to which any executive officer, director or person known to the registrant to be the beneficial owner of at least 5% of the registrant’s Common Stock may be deemed to have sole or shared voting power.
The number of shares outstanding of the registrant’s Common Stock as of February 15, 2018 was 35,837,900.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents incorporated herein by reference and the part of this Report into which each such document is incorporated:
None
FINANCIAL GRAVITY COMPANIES, INC.
FORM 10-K
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Certain statements contained in this Report that are not statements of historical fact constitute “forward-looking statements.” Words such as “may,” “seek,” “expect,” “anticipate,” “estimate,” “project,” “budget,” “goal,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “strategy,” “believes,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements but are not the exclusive means of identifying such statements. Although the Company believes that the current views and expectations reflected in these forward-looking statements are reasonable, those views and expectations, and the Company’s future plans, operations, business strategies, operating results and financial position, are inherently subject to risks, uncertainties, and other factors, many of which are not under the Company’s control. Those risks, uncertainties, and other factors could cause the actual results to differ materially from those in the forward-looking statements. Those risks, uncertainties, and factors (including the risks contained in the section of this report titled “Risk Factors”) that could cause the Company’s actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements and its goals and strategies to not be achieved. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Report. The Company expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company can give no assurances that such forward-looking statements will prove to be correct.
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General
Financial Gravity Companies, Inc. (“Financial Gravity” or the “Company”) was incorporated under the laws of the State of Nevada on December 5, 2005. Its principal executive offices are located at 800 N. Watters Rd., Suite 120, Allen, Texas 75013. The Company’s telephone number is 469- 342-9100. The Company’s stock symbol is FGCO.
Unless otherwise provided in footnotes, all references from this point forward in this Report to “Financial Gravity,” “we,” “us,” “our company,” “our,” or the “Company” refer to the combined Financial Gravity Companies, Inc. entity, together with its subsidiaries.
Business Overview
The Company was incorporated in Nevada on December 5, 2005 as Kat Racing, Inc. On January 4, 2013, the Articles of Incorporation were amended to change the name of the Company to Prairie West Oil & Gas, Ltd. On July 26, 2013, the Articles of Incorporation were amended to change the name of the Company to Pacific Oil Company. On October 31, 2016, following a reverse merger transaction (the “Merger”), the Articles of Incorporation were amended to change the name of the Company to Financial Gravity Companies, Inc.
The accounting acquirer (legal acquiree) in the Merger, Financial Gravity Holdings, Inc. (“Financial Gravity Holdings”), was incorporated in Texas on September 29, 2014. On the effective date of the Merger, the business of Financial Gravity Holdings became the only business of Pacific Oil Company (currently named Financial Gravity Companies, Inc.).
Also pursuant to the Merger, each of the shares of Financial Gravity Holdings common stock issued and outstanding prior to the Merger was automatically converted into and exchangeable for an equivalent number of fully paid and non-assessable shares of Company common stock.
The accounting acquirer (legal acquiree) in the reverse merger transaction, Financial Gravity Holdings, is now a subsidiary of the Company. Business Legacy, Inc., founded in 2002, and Pollock Advisory Group, founded in 2007, were added on September 29, 2014, as subsidiaries. During fiscal year 2015, the Company acquired as additional subsidiaries, Cloud9b2b, LLC and SASH Corporation (dba Metro Data Processing). During fiscal year 2016, the Company acquired an additional subsidiary, Tax Coach Software, LLC. The Company and its subsidiaries deliver a wide range of accounting, tax planning and management services to high net worth individuals and businesses nationwide.
Organic growth has come in four key areas.
| · | Partner Program |
| · | Tax Services, including Tax Blueprints and ongoing Tax Operating system services |
| · | Wealth Management Services |
| · | Other Products and Services (Insurance and other miscellaneous products and services). |
All future growth is expected to come from these four key areas, as well as through organic growth, acquisitions, and strategic alliances.
Products and Services
The following outline briefly describes Financial Gravity’s various subsidiaries and the products and services they offer:
Financial Gravity Holdings, Inc. Financial Gravity Holdings engages 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.
Financial Gravity Operations, Inc. Financial Gravity Operations manages operational expenses for the shared services of the subsidiaries.
Financial Gravity Tax, Inc. formerly Business Legacy, Inc. Financial Gravity Tax is a bookkeeping, tax planning and payroll service provider for small companies and individuals.
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Financial Gravity Wealth, Inc. formerly Pollock Advisory Group, Inc. Financial Gravity Wealth is a registered investment advisor and provides asset management services.
Financial Gravity Business, LLC formerly Cloud9b2b, LLC Financial Gravity Business provides business consulting services to Small Business Owners that identify way to leverage a business’ current assets (people, platforms and processes) and reduce exposure to risk, both short-term and long-term, while simplifying the business and increasing profitability.
Financial Gravity Ventures, LLC formerly Cloud9Accelerator, LLC Financial Gravity Ventures holds acquired companies and business assets until they are integrated into the main stream Financial Gravity business structure.
Sash Corporation dba Metro Data Processing Metro Data Processing provides payroll services, software and support solutions to business owners.
Tax Coach Software, LLC Tax Coach Software provides three primary services including monthly subscriptions to the “TaxCoach” software system, coaching and email marketing services.
Competition
The market is comprised of a very large selection of varied suppliers that provide financial advisory, accounting, and tax needs. These include accounting firms, certified public accountants (“CPA's”), bookkeeping businesses, estate planners, lawyers, wealth management consultants, estate offices, private offices, banks, and large financial institutions. However, many of these firms are either too big to provide the customized services that small business owners are seeking, are too expensive, or simply do not have the customized services that Financial Gravity offers to meet the needs of small business owners and high net worth individuals.
Financial Gravity has a unique product and service delivery model that has been proven to work over the past years. Financial Gravity believes that its superior products, services and overall customer service will enable it to achieve its target sales and revenue.
In addition, Financial Gravity considers a number of its small to medium-sized business competitors to potentially be attractive acquisition targets.
Intellectual Property
Financial Gravity maintains copyrights or trademarks on all of its printed marketing materials, the financialgravity.com website and other web pages, and proprietary software. Financial Gravity’s goal is to preserve its trade secrets and operate without infringing on the proprietary rights of other parties.
To help protect its proprietary know-how, which is not patentable, Financial Gravity currently relies and will in the future rely on trade secret protection and confidentiality agreements to protect its interests. To this end, Financial Gravity requires all its employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to Financial Gravity of the ideas, developments, discoveries and inventions important to its business.
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Employees
As of September 30, 2017, the Company had approximately 19 full-time employees. None of the Company’s employees are covered by a collective bargaining agreement. The Company believes that it maintains good relations with its employees.
Legal Proceedings
From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of its business or otherwise. A subsidiary of the Company is currently involved in one legal proceeding, the outcome of which will not be material to its ability to operate or market its services, its consolidated financial position, results of operations or cash flows.
Government Regulation
The services provided by Financial Gravity, through its subsidiaries, are extensively regulated by federal and state authorities in the United States. Financial Gravity believes it is in compliance with federal and state qualification and registration requirements in order that it may continue to provide services to its clients consistent with applicable laws and regulations.
The Company’s limited operating history may not serve as an adequate basis to judge its future prospects and results of operations. Financial Gravity has a relatively limited operating history. Its limited operating history and the unpredictability of the wealth management industry make it difficult for investors to evaluate its business. An investor in its securities must consider the risks, uncertainties and difficulties frequently encountered by companies in rapidly evolving markets.
The Company will need additional financing to implement its business plan. The Company will need additional financing to fully implement its business plan in a manner that not only continues to expand an already established direct-to-consumer approach, but also allows the Company to establish a stronger brand name in all the areas in which it operates. In particular, the Company will need additional financing to:
| · | Effectuate its business plan and further develop its product and service lines; |
| · | Expand its facilities, human resources, and infrastructure; and |
| · | Increase its marketing efforts and lead generation. |
There are no assurances that additional financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead expenditures. The failure to adequately fund its capital requirements could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s stockholders and incurring additional indebtedness could involve the imposition of covenants that restrict the Company’s operations.
The Company’s products and services are subject to changes in applicable laws and regulations. The Company’s business is particularly subject to changing federal and state laws and regulations related to the provision of financial services to consumers. The Company’s continued success depends in part on its ability to anticipate and respond to these changes, and the Company may not be able to respond in a timely or commercially appropriate manner. If the Company fails to adjust its products and services in response to changing legal and/or regulatory requirements, the ability to deliver its products and services may be hindered, which in turn could have an adverse effect on the Company’s business, financial condition and results of operations.
The Company may continue to encounter substantial competition in its business. The Company believes that existing and new competitors will continue to improve their products and services, as well as introduce new products and services with competitive price and performance characteristics. The Company expects that it must continue to innovate, and to invest in product development and productivity improvements, to compete effectively in the several markets in which the Company participates. The Company’s competitors could develop a more efficient product or service or undertake more aggressive and costly marketing campaigns than those implemented by the Company, which could adversely affect the Company’s marketing strategies and have an adverse effect on the Company's business, financial condition and results of operations.
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Important factors affecting the Company's current ability to compete successfully include:
| · | lead generation and marketing costs; |
| · | service delivery protocols; |
| · | branded name advertising; and |
| · | product and service pricing. |
In periods of reduced demand for the Company's products and services, the Company can either choose to maintain market share by reducing product and service pricing to meet the competition, or maintain its product and service pricing, which would likely sacrifice market share. Sales and overall profitability may be reduced in either case. In addition, there can be no assurance that additional competitors will not enter the Company's existing markets, or that the Company will be able to continue to compete successfully against its competition.
The Company may not successfully manage its growth. The Company’s success will depend upon the expansion of its operations and the effective management of its growth, which will place a significant strain on its management and on its administrative, operational and financial resources. To manage this growth, it must expand its facilities, augment its operational, financial and management systems, and hire and train additional qualified personnel. If it is unable to manage its growth effectively, its business would be harmed.
The Company relies on key executive officers, and their knowledge of its business and technical expertise would be difficult to replace. The Company is highly dependent on its executive officers. If one or more of the Company's senior executives or other key personnel are unable or unwilling to continue in their present positions, the Company may not be able to replace them easily or at all, and the Company’s business may be disrupted. Competition for senior management personnel is intense, the pool of qualified candidates is very limited, and it may not be able to retain the services of its senior executives or attract and retain high-quality senior executives in the future. Such failure could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company may never pay dividends to its common stockholders. The Company currently intends to retain its future earnings to support operations and to finance expansion; accordingly, the Company does not anticipate paying any cash dividends in the foreseeable future.
The declaration, payment and amount of any future dividends on common stock will be at the discretion of the Company's Board of Directors, and will depend upon, among other things, earnings, financial condition, capital requirements, level of indebtedness and other considerations the Board of Directors considers relevant. There is no assurance that future dividends will be paid on common stock or, if dividends are paid, the amount thereof.
The Company’s common stock is quoted through the OTC Markets, which may have an unfavorable impact on its stock price and liquidity. The Company’s common stock is quoted on the OTC Markets, which is a significantly more limited market than the New York Stock Exchange or NASDAQ. The trading volume may be limited by the fact that many major institutional investment funds, including mutual funds, follow a policy of not investing in OTC Markets stocks and certain major brokerage firms restrict their brokers from recommending OTC Markets stocks because they are considered speculative and volatile.
The trading volume of the Company’s common stock has been and may continue to be limited and sporadic. As a result, the quoted price for the Company’s common stock on the OTC Markets may not necessarily be a reliable indicator of its fair market value.
Additionally, the securities of small capitalization companies may trade less frequently and in more limited volume than those of more established companies. The market for small capitalization companies is generally volatile, with wide price fluctuations not necessarily related to the operating performance of such companies.
The Company’s common stock is subject to price volatility unrelated to its operations. The market price of the Company’s common stock could fluctuate substantially due to a variety of factors, including market perception of the Company’s ability to achieve its planned growth, operating results of the Company and of other companies in the same industry, trading volume in the Company’s common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company or its competitors.
The Company’s common stock is classified as a “penny stock.” Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. It is likely that the Company’s common stock will be considered to be a penny stock for the immediately foreseeable future.
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For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the investor, make a reasonable determination that transactions in penny stocks are suitable for that person, and make a reasonable determination that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also provide disclosure to its customers, prior to executing trades, about the risks of investing in penny stocks in both public offerings and in secondary trading, the commissions payable to both the broker-dealer and the registered representative, and the rights and remedies available to an investor in cases of fraud in penny stock transactions.
Because of these regulations, broker-dealers may not wish to furnish the necessary paperwork and disclosures and/or may encounter difficulties in their attempt to buy or sell shares of the Company’s common stock, which may in turn affect the ability of Company stockholders to sell their shares.
Accordingly, the penny stock classification adversely affects any market liquidity for the Company’s common stock, and subjects the shares to certain risks associated with trading in penny stocks. These risks include difficulty for investors in purchasing or disposing of shares, difficulty in obtaining accurate bid and ask quotations, difficulty in establishing the market value of the shares, and a lack of securities analyst coverage.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
The Company’s corporate offices are located at 800 N Watters Road, Suite 120, Allen, Texas 75013, where Financial Gravity has 4,015 square feet of office space under lease. Pursuant to an office lease dated December 3, 2013, Financial Gravity is required to make monthly lease payments of $7,689 per month (including operating expenses). The lease expires on October 31, 2018.
Metro Data Processing’s offices are located at 1545 S. Harvard Avenue, Tulsa, Oklahoma 74112, where the company occupies 1,590 square feet of office space under lease. Pursuant to an office lease dated September 10, 2015, Metro Data Processing is required to make monthly lease payments of $1,126 per month (including operating expenses). The lease automatically renews every 12 months.
Tax Coach Software’s offices are located at 2619 Erie Ave., Suite 2D, Cincinnati, Ohio 75208. The company makes monthly lease payments of $1,250 per month (including operating expenses) pursuant to a month to month lease agreement with a 30-day notice to terminate.
From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of its business or otherwise. A subsidiary of the Company is currently involved in one legal proceeding, the outcome of which will not be material to its ability to operate or market its services, its consolidated financial position, results of operations or cash flows.
See Note 8 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for more information.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
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Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.
Market Information
The Company’s Common Stock is currently traded in the over-the-counter market and quoted under the symbol FGCO. The following are the high and low sales prices for the Company’s Common Stock for the periods reflected below:
| Fiscal Year Ended September 30, 2016 | High | Low | ||||||
| First Quarter | $ | 1.00 | $ | 0.02 | ||||
| Second Quarter | $ | 1.00 | $ | 0.01 | ||||
| Third Quarter | $ | 1.00 | $ | 0.01 | ||||
| Fourth Quarter | $ | 0.01 | $ | 0.01 | ||||
| Fiscal Year Ended September 30, 2017 | High | Low | ||||||
| First Quarter | $ | 3.34 | $ | 0.01 | ||||
| Second Quarter | $ | 2.50 | $ | 0.85 | ||||
| Third Quarter | $ | 1.06 | $ | 0.08 | ||||
| Fourth Quarter | $ | 1.05 | $ | 0.60 | ||||
The above prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
Holders
The approximate number of stockholders of record of the Company’s Common Stock on February 15, 2018 was 1,689.
Dividends
The Company has never paid any cash dividends on its common stock, and it is anticipated that none will be paid in the foreseeable future.
Recent Sales of Unregistered Securities
During the year ended September 30, 2017, the Company issued an additional 725,000 shares of common stock to a number of accredited investors pursuant to the private placement, for an aggregate price of $725,000.
Subsequent to September 30, 2017, an aggregate of 100,000 shares of the Company’s common stock have been sold for $100,000. Additionally, an aggregate of 50,000 warrants to purchase the Company’s common stock have been issued in conjunction with the sale of the Company’s common stock.
Subsequent to September 30, 2017, an aggregate of 372,500 options to purchase the Company’s common stock have been granted.
The sales of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, the Company believes that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. Each investor represented that such investor either (A) is an “accredited investor,” (B) has such knowledge and experience in financial and business matters that the investor is capable of evaluating the merits and risks of acquiring the shares of the Company’s common stock, or (C) appointed an appropriate person to act as the investor’s purchaser representative in connection with evaluating the merits and risks of acquiring the shares of the Company’s common stock. The investors received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
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The Company’s option grants were effected pursuant to Rule 701 promulgated under the Securities Act.
Repurchases of Equity Securities
The Company did not repurchase any of its equity securities during the years ended September 30, 2017 or 2016.
Item 6. SELECTED FINANCIAL DATA.
Not applicable.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand its historical results of operations during the periods presented and its financial condition. This MD&A should be read in conjunction with its financial statements and the accompanying notes, and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause its actual results to differ materially from management’s expectations. See the sections entitled “Forward-Looking Statements” and “Risk Factors” above.
Plan of Operations
Financial Gravity Companies, Inc. (“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 Holdings, Inc.
This entity was created 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.
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 its 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 its 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.
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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 its 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 its no-risk “2x Promise” (the Company guarantee’s to find double its 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. Its tax planning sets us apart from typical accounting and tax preparation firms. The Company looks 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. The 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 impact of this rule is uncertain, the Company is positioned to do what it 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, its status as an RIA makes the Company 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. The Company intends to test the service offering / coaching program with the first two markets where it has 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”.
The Company has also developed its 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, the Company has created the Certified Tax Master® designation and partner program for CPA’s and Enrolled Agents (“EA’s”). To its 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 the Company’s corporate family employs its 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.
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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. The Company 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 and Metro Data Processing is based in Tulsa, OK. The Company has been a fixture in payroll processing in the Tulsa area for years and should prove to be a compelling storefront to begin selling additional tax services.
The Company goes to market primarily via Financial Advisors and accountants. Its 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 its 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, the Company has a significant competitive advantage over others who may try to execute the same business plan.
Significant effort and investment capital has been incurred by the Company over the past few years in order to attract and maintain a qualified and capable staff, develop proprietary solutions, and implement systems, procedures, and infrastructure to execute the business plan on a large scale. Given the short time frame this current market opportunity has existed and due to the complexity of the model, the Company has a significant competitive advantage over others who may try to execute the same business plan.
Results of Operations for the year ended September 30, 2017 compared to the year ended September 30, 2016
Revenues
For the year ended September 30, 2017, revenue increased $773,500 or 28% to $3,530,499 from $2,756,999 for the year ended September 30, 2016. The increase in revenue reflects increase in service income and investment management fees primarily due to new customer product and service sales and increased assets under management.
Operating Expenses
Cost of services activity remained relatively stable for the years ended September 30, 2017 and 2016.
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 $240,104 or 19% to $997,117 for the year ended September 30, 2017 from $1,237,221 for the year ended September 30, 2016. This decrease is primarily attributable to reduced legal fees incurred and reduced merger costs.
Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $53,803 to $99,744 for the year ended September 30, 2017 from $153,547 for the year ended September 30, 2016. The decrease is primarily due to the fact that the Tax Coach Software prospect list was fully amortized by September 30, 2016.
Impairment of goodwill of $662,967 for the year ended September 30, 2016 was a result of the impairment of goodwill from the acquisitions of Cloud9B2B and MDP.
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General and administrative expenses increased $339,944 or 83% to $748,481 for the year ended September 30, 2017 from $408,537 for the year ended September 30, 2016. The increase is primarily due to an increase in costs associated with the growth of the partner program.
Management fees – related party expenses decreased $13,333 or 6.25% to $200,000 for the year ended September 30, 2017 from $213,333 for the year ended September 30, 2016.
Marketing expenses decreased $26,903 or 7% to $375,499 for the year ended September 30, 2017 from $402,402 for the year ended September 30, 2016. During the year ended September 30, 2016, the Company began doing Press Releases and advertising on Facebook. In addition, the Company engaged several consultants to assist leadership and build new business funnels in an effort to continue to grow revenue streams.
Salaries and wages expenses increased $230,848 or 13% to $1,961,126 for the year ended September 30, 2017 from $1,730,278 for the year ended September 30, 2016. During the year ended September 30, 2017, the number of clients increased which resulted in higher commissions paid. Furthermore, commission rates increased in 2016 as sales representatives moved from salary plus commission to 100% commission.
The Company experienced an increase in its bottom line of $1,159,164 or 54% to a net loss of $975,975 for the year ended September 30, 2017 from a net loss of $2,135,139 for the year ended September 30, 2016, 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 the Company’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.
TaxCoach Software has 3 types of services that are charged and collected on a month to month subscription basis (TaxCoach basic membership, All-Stars coaching, and Wire Service weekly broadcast email). None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships.
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. The allowance for doubtful accounts was $17,014 and $-0- as of September 30, 2017 and 2016, respectively.
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.
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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 0.85% to 1.41% in 2017 and 0.97% in 2016, dividend yield of 0%, expected life of 2 years and volatility of 43% - 137%.
Liquidity and Capital Resources
As of September 30, 2017, the Company had cash and cash equivalents of $444,420. The increase of $311,617 in cash and cash equivalents from September 30, 2016 was due to net cash used in operating activities of $745,311, net cash used in investing activities of $1,536 and net cash provided by financing activities of $1,058,464.
Net cash used in operating activities was $745,311 for the year ended September 30, 2017, compared to $1,291,503 net cash used in operating activities for the year ended September 30, 2016. The net cash used in operating activities for the year ended September 30, 2017 was due to net loss of $975,975, adjusted primarily by the following: (1) increases in depreciation and amortization of $99,744, common stock transactions of $163,273, accounts payable – trade of $24,585, accrued expenses of $18,898, and deferred revenue of $62,862, (2) offset by decreases in trade account receivable of $30,952, prepaid expenses of $32,364, and pre-merger payables of $75,382.
Net cash used in investing activities was $1,536 for the year ended September 30, 2017, compared to net cash provided by investing activities of $44,541 for the year ended September 30, 2016. The Company purchased more equipment and trademarks during the year ended September 30, 2017 compared to September 30, 2016, but in 2016, $57,025 of cash was acquired from acquisition of subsidiaries.
Net cash provided by financing activities was $1,058,464 for the year ended September 30, 2017, compared to net cash provided by financing activities of $578,223 for the year ended September 30, 2016. Financing activities for the year ended September 30, 2017 consisted primarily of $725,000 in proceeds from sales of common stock and $450,000 in proceeds from notes payable.
As shown below, at September 30, 2017, its contractual cash obligations totaled approximately $520,693 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 | |||||||||||||||
| Notes payable | $ | 165,562 | $ | 281,031 | $ | – | $ | – | $ | 446,593 | ||||||||||
| Operating leases | 68,400 | 5,700 | – | – | 74,100 | |||||||||||||||
| Total contractual cash obligations | $ | 233,962 | $ | 286,731 | $ | – | $ | – | $ | 520,693 | ||||||||||
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 its 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 its operations. Management, in the normal course of business, is trying to raise additional capital through sales of common stock as well as seeking financing from third parties, via both debt and equity, to balance the Company’s cash requirements and to finance specific capital projects.
Off Balance Sheet Transactions and Related Matters
Other than operating leases discussed in Note 8 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.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk. The Company’s 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 its financial condition and ability to continue as a going concern.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are included in this report in Part IV, Item 15.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. Its management, including its chief executive officer and chief financial officer, assessed the effectiveness of its internal control over financial reporting as of September 30, 2017. In making this assessment, its management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. The Company’s management, including its chief executive officer and chief financial officer, has concluded that, as of September 30, 2017, its internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles. The Company’s management reviewed the results of their assessment with its board of directors.
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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
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Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Directors and Executive Officers
Set forth below is certain information regarding the persons who were directors and executive officers at any time during the fiscal year 2017.
| Name | Age | Position with the Company | |||
| John Pollock | 51 | Chairman of the Board, Chief Executive Officer | |||
| Paul Williams | 61 | Vice Chairman of the Board, Chief Financial Officer, Secretary and Treasurer | |||
| Dan Sundby | 55 | President, Chief Sales Officer and Board Member | |||
| James F. Reggio | 54 | Chief Technology Officer and Chief Marketing Officer | |||
| Edward A. Lyon | 53 | Chief Tax Strategist and Board Member | |||
| George Crumley | 50 | Assistant Secretary, Assistant Treasurer and Board Member | |||
John Pollock, 51, has been CEO/Founder of Business Legacy, Inc. since 2002, Pollock Advisory Group since 2007 and he is currently CEO and Chairman of Financial Gravity Companies, Inc. Mr. Pollock’s specific experience, qualifications, attributes or skills that led to the conclusion that he should serve as a director for the Company:
| · | Has served as CEO and Chairman of Financial Gravity since its inception |
| · | A seasoned manager |
Paul O. Williams, 61, has served on the Company’s Board of Directors and as Vice Chairman of the Board since 2015, and has served as our Chief Financial Officer and Secretary – Treasurer since 2016. He graduated from Austin College in Sherman, Texas in 1978 and the Institute for Organization Management in Washington, DC in 1982. Since 2007, Mr. Williams has served as Chief Executive Officer of Bison Financial Group, Inc., a corporate financial advisory and business development firm serving middle market growth companies. Through Bison Financial Group, Mr. Williams personally provides corporate financial advisory and business development consulting services.
Mr. Williams also currently serves as Chairman of the Board of the following private companies: Curtis Mathes, Inc. (since 2013); Championship Sports Group, Inc. (since 2012); Triton Consolidated, Inc. (since 2016); Day One Consulting, Inc. (since 2016); and Investor Relations, Inc. (since 2016). Mr. Williams also currently serves as Vice Chairman of the Board and Chief Financial Officer of Dynamic Chemical Solutions, Inc. (since 2016), and is on the Board of Directors of the Frisco (Texas) Chamber of Commerce.
On behalf of Halo Companies, Inc. (OTC: HALN), Mr. Williams has served as Vice Chairman of the Board, Treasurer, and Assistant Secretary from 2009 to Present, and Served as Chief Financial Officer from 2009 to 2012 and from 2015 to Present. Halo Companies, Inc. is a nationwide distressed asset services company, providing technology-driven asset management, portfolio due diligence, acquisition, repositioning and liquidation strategies for the private investment and mortgage servicing industry.
The breadth of Mr. Williams’ entrepreneurial and financial services experience led the Board of Directors to the conclusion that he is qualified to serve as a director for the Company. Mr. Williams’ specific experience, qualifications, attributes or skills that led to the conclusion that he should serve as a director for the Company:
| · | Over 30 years of business experience, primarily in capital markets, mergers, and acquisitions |
| · | Chief Executive Officer of Bison Financial Group, a corporate financial advisory and business development firm serving middle market growth companies |
| · | Has served as both officer and director of other public companies |
| · | Financial Gravity is the third public company for which Mr. Williams is serving as Chief Financial Officer |
| · | Within the last 5 years, Mr. Williams served as Vice-Chairman of the Board and Chief Financial Officer at Halo Companies, Inc., a public company |
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Dan Sundby, 55, brings over 30 years of experience in sales, sales management, and sales training. He has built sales teams nationally within the insurance and financial services industries. Dan’s organization was consistently the top producing team with each company he recruited and trained for. Dan also recruited and trained sales teams in the receivables management industry and with a regional home builder with record setting performance in each. Dan is currently serving as President and Chief Sales Officer for Financial Gravity and is responsible for building their nationwide agent team.
James F. Reggio, 54, has been the Company’s Chief Marketing Officer & Chief Technology Officer since January of 2015 when he joined the company via the Cloud9 Holdings acquisition, where he served as CTO beginning in 2013. From 2006 – 2013, Mr. Reggio held various roles with EFA Processing LP, including Chief Technology Officer, Senior Vice President of Technology, and Executive Vice President. Mr. Reggio was principle with Exectech Consulting Services from 2004 – 2006. He served as Chief Information Officer of Affirmative Insurance Holdings, Inc. from 2001 – 2004 and Chief Information Officer of Instant Insurance Holdings, Inc. from 1999 – 2001, as well as Chief Information Officer and Vice President of The St. Paul Specialty Auto Group from 1997 – 1999. Mr. Reggio received his BA in Computer Science from Western Michigan University in 1986, and currently serves as a board member for the Innovate Flower Mound Entrepreneur Center, and is a managing partner in Tri-Liberty LLC and DayOne Consulting LLC.
Edward A. Lyon, 53, has been the Company’s Chief Tax Strategist and a Director since October, 2015. From 2005 until 2015, he was Partner-in-Charge of Content at Tax Coach Software, which he founded in 2005. Mr. Lyon received a B.A. in History from Hamilton College in 1986 and a J.D. from the University of Cincinnati College of Law in 1991. Mr. Lyon’s specific experience, qualifications, attributes or skills that led to the conclusion that he should serve as a director for the Company:
| · | The founder of Tax Coach Software, managing the company for 11 years |
| · | A deep knowledge of accounting and financial services industries |
| · | A nationally-recognized expert on tax planning |
| · | The author of 8 books, and has appeared on over 500 radio and television broadcasts to speak about his areas of expertise |
George E. Crumley, 50, has been on the Board of Directors since January 2015 and has served as our Assistant Secretary – Assistant Treasurer since October 2017. From 1994 to 2007 he was a practicing litigation attorney with the law firm of Stradley & Wright in Dallas, Texas where he was named partner in 2001. He formed Pittenger, Nuspl & Crumley in 2008 where he continues to practice, advising businesses in matters including formation, contracts, employees, real estate and litigation among other areas of law. He received BA. and J.D. degrees from Baylor University in 1989 and 1993, respectively. Mr. Crumley currently serves on the Board of Directors for Legacy Christian Academy in Frisco, Texas. Mr. Crumley’s specific experience, qualifications, attributes or skills that led to the conclusion that he should serve as a director for the Company:
| · | 23 years of experience in civil litigation and representing businesses with formation, contracts, lawsuits, employee disputes, real estate, and other matters. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires officers, directors and persons who beneficially own more than 10% of a class of our equity securities registered under the Exchange Act to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us during fiscal year 2017 and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2017, or written representations that Form 5 was not required for fiscal year 2017, we believe that all Section 16(a) filing requirements applicable to each of our officers, directors and greater-than-ten percent stockholders were fulfilled in a timely manner. We have notified all known beneficial owners of more than 10% of our common stock of their requirement to file ownership reports with the Securities and Exchange Commission.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive, financial, and accounting officers and is included as an exhibit with this filing.
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No Committees of the Board of Directors; No Financial Expert
The Company does not presently have a separately constituted audit committee, compensation committee, nominating committee, executive committee or any other committees of its Board of Directors. Nor does it have an audit committee “financial expert”. At present, its entire Board of Directors acts as its audit committee. None of the members of its Board of Directors meets the definition of “audit committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated by the Securities and Exchange Commission. It has not retained an audit committee financial expert because it does not believe that it can do so without undue cost and expense. Moreover, it believes that the present members of the Board of Directors, taken as a whole, have sufficient knowledge and experience in financial affairs to effectively perform their duties.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The particulars of compensation paid to the following persons during the fiscal period ended September 30, 2017 and 2016 are set out in the summary compensation table below:
| · | our Chief Executive Officer (Principal Executive Officer); |
| · | our Chief Financial Officer (Principal Financial Officer); |
| · | each of our three most highly compensated executive officers, other than the Principal Executive Officer and the Principal Financial Officer, who were serving as executive officers at the end of the fiscal year ended September 30, 2017 and 2016; and |
| · | up to two additional individuals for whom disclosure would have been provided under the item above but for the fact that the individual was not serving as our executive officer at the end of the fiscal year ended September 30, 2017 and 2016. |
(collectively, the “Named Executive Officers”):
SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary | Bonus | Stock Awards | Option Awards | All Other Compensation | Total | |||||||||||||||||||||
| John Pollock | 2017 | $ | 100,000 | $ | – | $ | – | $ | – | $ | 200,000 | (*) | $ | 300,000 | ||||||||||||||
| CEO, Principal Executive Officer | 2016 | 100,000 | – | – | – | 213,333 | (*) | 313,333 | ||||||||||||||||||||
| Paul Williams | 2017 | $ | 96,000 | $ | – | $ | – | $ | – | $ | – | $ | 96,000 | |||||||||||||||
| CFO, Principal Financial Officer | 2016 | – | – | – | – | 49,000 | (***) | 49,000 | ||||||||||||||||||||
| Dan Sundby | 2017 | $ | 100,000 | $ | – | $ | – | $ | 19,382 | $ | – | $ | 119,382 | |||||||||||||||
| President and CSO | ||||||||||||||||||||||||||||
| Dave Crowley | 2016 | $ | 100,000 | $ | – | $ | – | $ | – | $ | – | $ | 100,000 | |||||||||||||||
| President and CSO | ||||||||||||||||||||||||||||
| Edward A. Lyon | 2017 | $ | 42,000 | $ | – | $ | – | $ | – | $ | 198,000 | (**) | $ | 240,000 | ||||||||||||||
| CTS | 2016 | 42,000 | – | – | – | 198,000 | (**) | 240,000 | ||||||||||||||||||||
Except as described below, none of the Named Executive Officers has an employment agreement.
Edward A. Lyon, a member of the Board of Directors, is party to an employment agreement with Tax Coach Software, LLC, a subsidiary of the Company. The Agreement was entered into effective November 1, 2015, and provides for Mr. Lyon to serve as General Manager, responsible for supervising the business and affairs of Tax Coach Software. The agreement has a three-year term, which may be extended. The agreement provides for base salary of $42,000 per year, plus bonus. The annual bonus is the sum of the following: (i) for Tax Coach Software revenues in excess of $850,000 and less than $950,000, forty percent (40%) of Tax Coach Software’s gross profit (as determined in accordance with generally acceptable accounting principles, net of amounts paid under employment agreements and consulting agreements), plus (ii) for Tax Coach Software revenues in excess of $950,000, twenty percent (20%) of Tax Coach Software’s gross profit (as determined in accordance with generally acceptable accounting principles, net of amounts paid under employment agreements and consulting agreements).
(*) For Mr. Pollock, the amount shown in the Summary Compensation Table under the heading All Other Compensation represents amounts paid by the Company to a consulting firm owned and controlled by Mr. Pollock, in compensation for services not related to his roles as an officer and director of the Company.
(**) For Mr. Lyon, the amount shown in the Summary Compensation Table under the heading All Other Compensation represents amounts paid by the Company to a consulting firm owned and controlled by Mr. Lyon, in compensation for services not related to his roles as an officer and director of the Company.
(***) For Mr. Williams, the amount shown in the Summary Compensation Table under the heading All Other Compensation represents amounts paid by the Company to a consulting firm owned and controlled by Mr. Williams, in compensation for services not related to his roles as an officer and director of the Company.
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Summary Compensation
Except as described above, the Company has no employment agreements with any of its Directors or executive officers.
For the fiscal year ended September 30, 2017, no outstanding stock options or other equity-based awards were re-priced or otherwise materially modified. No stock appreciation rights have been granted to any of the Directors or executive officers and none of the Directors or executive officers exercised any stock options or stock appreciation rights. There are no non-equity incentive plan agreements with any of the Directors or executive officers.
Outstanding Equity Awards at Fiscal Year-end
This section is not applicable to any Named Executive Officer as of September 30, 2017.
Compensation of Directors
This section is not applicable as there was no director compensation for year ended September 30, 2017.
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
There is no employment or other contracts or arrangements with officers or Directors. There are no compensation plans or arrangements, including payments to be made by us, with respect to the Company’s officers, Directors or consultants that would result from the resignation, retirement or any other termination of service in respect of such Directors, officers or consultants. There are no arrangements for Directors, officers, employees or consultants that would result from a change-in-control.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the beneficial ownership, as of September 30, 2017, of the Company’s common stock, which is the Company’s only outstanding class of voting securities, and the voting power resulting from such beneficial ownership, by
| · | each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s outstanding common stock; |
| · | each director of the Company; |
| · | each executive officer of the Company; and |
| · | all directors and executive officers of the Company as a group. |
| Beneficial Owner(1) | Amount of Beneficial Ownership (1) | Percentage of Shares | ||||||
| John Pollock (2) | 15,037,962 | 42.1% | ||||||
| Dave Crowley (2) | 3,000,000 | 8.4% | ||||||
| Keith VandeStadt (2, 5) | 2,821,500 | 7.9% | ||||||
| Edward A. Lyon (2) | 2,593,500 | 7.3% | ||||||
| Paul Williams (2) | 1,896,414 | 5.3% | ||||||
| James F. Reggio (2, 3) | 778,100 | 2.1% | ||||||
| Rick Johnson (2, 4) | 650,000 | 1.8% | ||||||
| George Crumley (2) | 150,000 | * | ||||||
| Directors and executive officers as group (six persons) | 23,545,976 | 65.9% | ||||||
| (1) | except as noted below, each beneficial owner has sole voting and investment power with respect to all shares attributable to that owner. |
| (2) | The address for each such beneficial owner is 800 N. Watters Road, Suite 120, Allen, Texas 75013. |
| (3) | Includes 180,000 options that vested upon closing of the merger on September 30, 2016. |
| (4) | Includes 650,000 options that vested upon closing of the merger on September 30, 2016 |
| (5) | Non director or executive officer with more than 5% ownership. |
| * | indicates an ownership percentage of less than one percent. |
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Changes in Control
The Company is not aware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of the Company.
Securities authorized for issuance under equity compensation plans
The following table provides information as of the end of the most recently completed fiscal year, with respect to Company compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
| Equity Compensation Plan Information | ||||||||||||||||
| A(1) | B | C | ||||||||||||||
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in Column A) | |||||||||||||
| Equity compensation plans approved by security holders | 9,000,000 | (2,4) | $ | 0.64 | – | (4) | ||||||||||
| Equity compensation plans not approved by security holders | 20,000,000 | (3) | 0.78 | 19,383,200 | (5) | |||||||||||
| Total | 29,000,000 | $ | 0.67 | 19,383,200 | ||||||||||||
| (1) | As consequence of the Merger, outstanding options of the 2015 Plan in the amount of 2,200,346 of the Company’s shares have vested. |
| (2) | Shares subject to stock options under 2015 Stock Option Plan. |
| (3) | Shares subject to stock options under 2016 Stock Option Plan. |
| (4) | The 2015 Stock Option Plan was replaced by the 2016 Stock Option Plan. |
| (5) | Shares available for grant of stock options to employees, directors and consultants under the 2015 Stock Option Plan. |
Following is a brief description of the material features of each compensation plan under which equity securities of the Company are authorized for issuance. The 2015 Stock Option Plan and the 2016 Stock Option Plan were adopted without approval of Company security holders.
The Company has granted stock options to certain employees and contractors under its 2015 Stock Option Plan, assumed from Financial Gravity Holdings and under its 2016 Stock Option Plan. The Company is authorized to issue an aggregate of 20,000,000 options, of which 19,383,200 remain available for issuance, as non- statutory (non-qualified) stock options, under the 2016 Stock Option Plan. Currently outstanding options under the 2015 and 2016 Stock Option Plans vest over a period of no greater than two years and expire ten years from the grant date.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Transactions with Related Persons, Promoters and Certain Control Persons
Except as set forth below, none of the Company’s directors or officers, nor any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to the Company’s shares, nor any relative or spouse of any of the foregoing persons, has had any material interest, direct or indirect, in any transaction to which the Company was a party, and in which the amount involved exceeds the lesser of (i) $120,000 or (ii) one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years.
| 18 |
Bison Financial Group, whose Chief Executive Officer is Mr. Paul Williams, has provided corporate financial advisory and business development services to the Company for a flat fee of $3,000 per month. The provision of services provided by Bison Financial Group commenced in 2014, during which time Mr. Williams had no formal affiliation with the Company. During 2015, Mr. Williams was appointed to the board of directors of the Company and consequently became an affiliate of the Company. In 2016, Mr. Williams was appointed as Chief Financial Officer of the Company. The provision of services by Bison Financial Group ceased upon Mr. Williams being appointed as Chief Financial Officer. For the years ended September 30, 2017 and 2016, the Company paid Bison Financial Group for financial advisory and business development services, $0 and $49,000 respectively.
Effective as of October 1, 2015, Financial Gravity Holdings, a subsidiary of the Company, purchased all of the equity interests of Tax Coach Software, LLC, an Ohio limited liability company, for aggregate consideration of 2,000,000 shares of the common stock of Financial Gravity (the “Tax Coach Software Transaction”). The Purchase Agreement for the Tax Coach Software Transaction was amended effective as of March 25, 2016 to give effect to a three-for-one (3:1) forward split of the Financial Gravity Holdings common stock, bringing the aggregate consideration to 6,000,000 shares of the common stock of Financial Gravity Holdings.
TaxTuneup, LLC, which is an entity owned by Mr. Edward A. Lyon, a current director of the Company, received approximately 43% of the shares of Financial Gravity Holdings issued in the Tax Coach Software Transaction, then having an approximate value of $864,500. As a consequence of such issuance, Mr. Lyon is the beneficial owner of 7.3% of the Company’s common stock as of September 30, 2017 (after giving effect to the Merger).
Additionally, Van Data, LLC, which is an entity owned Keith VandeStadt, a greater than 5% beneficial shareholder of the Company, received approximately 47% of the shares of Financial Gravity Holdings issued in the Tax Coach Software Transaction, then having an approximate value of $940,500. As a consequence of such issuance, Mr. VandeStadt is the beneficial owner of 7.9% of the Company’s common stock as of September 30, 2017 (after giving effect to the Merger).
In the Tax Coach Software Transaction, the shares of Financial Gravity Holdings common stock received by TaxTuneup, LLC (owned by Mr. Lyon), do not include any of the shares of Financial Gravity Holdings common stock received by Van Data, LLC (owned by Mr. VandeStadt). Their respective holdings of Company common stock are completely separated.
During fiscal year 2017 and 2016, the Company paid $198,000 and $218,990, respectively to Van Data, LLC, a consulting firm owned and controlled by Keith VandeStadt, in compensation for maintaining the Tax Coach Software application and data, making enhancements and modifications to software as needed, maintaining server platform and web environment, applying updates to licensed content, and other services agreed upon in writing.
Director Independence; Board Leadership Structure
The Company’s common stock is quoted through the OTC System. For purposes of determining whether members of the Company’s Board of Directors are “independent,” the Company’s Board utilizes the standards set forth in the NASDAQ Stock Market Marketplace Rules. At present, the Company’s entire Board serves as its Audit, Compensation and Nominating Committees. The Company’s Board of Directors has determined that, of the Company’s present directors, George Crumley, constituting one of the five members of the Board, is an “independent director,” as defined under NASDAQ’s Marketplace Rules, for purposes of qualifying as independent members of the Board and an Audit, Compensation and Nominating Committee of the Board, but that John Pollock, Dave Crowley, Paul Williams and Edward A. Lyon are not “independent directors” since they currently serve as executive officers of the Company.
The Company’s Board of Directors is of the view that the current leadership structure is suitable for the Company at its present stage of development, and that the interests of the Company are best served by the combination of the roles of Chairman of the Board and Chief Executive Officer.
As a matter of regular practice, and as part of its oversight function, the Company’s Board of Directors undertakes a review of the significant risks in respect of the Company’s business. Such review is conducted in concert with outside professionals (including legal counsel) with expertise in substantive areas germane to the Company’s business. With the Company’s current governance structure, the Company’s Board of Directors and senior executives are, by and large, the same individuals, and consequently, there is not a significant division of oversight and operational responsibilities in managing the material risks facing the Company.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following information summarizes the fees billed to us by Lane Gorman Trubitt, PLLC and Whitley Penn LLP for professional services rendered for the fiscal years ended September 30, 2017 and 2016, respectively.
Audit Fees. Fees billed for services by Lane Gorman Trubitt, PLLC were $32,536 for fiscal year 2016. Fees billed or remainder to be billed for audit services by Whitley Penn LLP were $126,687 for fiscal year 2017 and $0 for fiscal year 2016. Audit fees include fees associated with the annual audit and the reviews of the Company’s quarterly reports on Form 10-Q, and other SEC filings.
| 19 |
Audit-Related Fees. None
Tax Fees. Fees billed or remainder to be billed for tax services by Whitley Penn LLP were $11,200 for fiscal year 2017 and $0 for fiscal year 2016
All Other Fees. None
Consistent with SEC policies regarding auditor independence, the audit committee has responsibility for appointing, setting compensation, approving and overseeing the work of the independent auditor. In recognition of this responsibility, the audit committee pre-approves all audit and permissible non-audit services provided by the independent auditor. The Board of Directors serves as the audit committee for the Company.
Consistent with SEC policies regarding auditor independence, the audit committee has responsibility for appointing, setting compensation, approving and overseeing the work of the independent auditor. In recognition of this responsibility, the audit committee pre-approves all audit and permissible non-audit services provided by the independent auditor. The Board of Directors serves as the audit committee for the Company.
| 20 |
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and financial statement schedules
| (1) | and (2) The financial statements and financial statement schedules required to be filed as part of this report are set forth in Item 8 of Part II of this report. |
(3) Exhibits. See Item 15(b) below.
(b) Exhibits required by Item 601 of Regulation S-K
| Exhibit No. | Description |
| 14.1 | Code of Ethics |
| 31.1 | Sarbanes-Oxley Section 302(a) Certification of John Pollock |
| 31.2 | Sarbanes-Oxley Section 302(a) Certification of Paul Williams |
| 32.1 | Sarbanes-Oxley Section 906 Certifications |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
| 21 |
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: February 19, 2018 | By: | /s/ John Pollock | |
| John Pollock | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date: February 19, 2018 | By: | /s/ Paul Williams | |
| Paul Williams | |||
| Chief Financial Officer | |||
| (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Capacity | Date | |
| /s/ John Pollock | Chairman, CEO | February 19, 2018 | |
| John Pollock | (principal executive officer) | ||
| /s/ Paul Williams | Vice Chairman, CFO | February 19, 2018 | |
| Paul Williams | (principal financial officer) | ||
| /s/ Dan Sundby | Director | February 19, 2018 | |
| Dan Sundby | |||
| /s/ Edward A. Lyon | Director | February 19, 2018 | |
| Edward A. Lyon | |||
| /s/ George Crumley | Director | February 19, 2018 | |
| George Crumley |
| 22 |
FINANCIAL GRAVITY COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SEPTEMBER 30, 2017 AND 2016
FINANCIAL GRAVITY COMPANIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2017 AND 2016
CONTENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Financial Gravity Companies, Inc.
We have audited the accompanying consolidated balance sheets of Financial Gravity Companies, Inc. (the “Company”), as of September 30, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of September 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Whitley Penn LLP
Dallas, Texas
February 19, 2018
| F-2 |
Financial Gravity Companies, Inc. and Subsidiaries
As of September 30,
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 444,420 | $ | 132,803 | ||||
| Trade accounts receivable, net | 109,795 | 78,843 | ||||||
| Accounts receivable - related party | 4,506 | 4,506 | ||||||
| Prepaid expenses | 64,603 | 32,239 | ||||||
| Total current assets | 623,324 | 248,391 | ||||||
| OTHER ASSETS | ||||||||
| Property and equipment, net | 127,503 | 141,080 | ||||||
| Investment | – | 10,000 | ||||||
| Customer relationships, net | 22,450 | 33,675 | ||||||
| Proprietary content, net | 393,824 | 459,463 | ||||||
| Trade name | 69,300 | 69,300 | ||||||
| Non-compete agreements, net | 15,780 | 21,040 | ||||||
| Trademarks | 30,085 | 22,592 | ||||||
| Goodwill | 1,094,702 | 1,094,702 | ||||||
| TOTAL ASSETS | $ | 2,376,968 | $ | 2,100,243 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable - trade | 51,814 | 27,229 | ||||||
| Accrued expenses | 122,552 | 103,654 | ||||||
| Deferred revenue | 95,601 | 32,739 | ||||||
| Line of credit | – | 19,732 | ||||||
| Notes payable | 165,562 | 93,397 | ||||||
| Pre-merger payables | – | 99,056 | ||||||
| Total current liabilities | 435,529 | 375,807 | ||||||
| NOTES PAYABLE | 281,031 | – | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value; 300,000,000 shares authorized; 35,737,900 shares issued and outstanding as of September 30, 2017 and 34,862,900 shares issued and outstanding as of September 30, 2016 | 35,738 | 34,863 | ||||||
| Additional paid-in capital | 5,679,668 | 4,768,596 | ||||||
| Accumulated deficit | (4,054,998 | ) | (3,079,023 | ) | ||||
| Total stockholders’ equity | 1,660,408 | 1,724,436 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,376,968 | $ | 2,100,243 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
| 2017 | 2016 | |||||||
| REVENUE | ||||||||
| Investment management fees | $ | 1,279,206 | $ | 920,813 | ||||
| Service income | 2,195,718 | 1,750,613 | ||||||
| Commissions | 50,575 | 69,073 | ||||||
| Rental income | 5,000 | 16,500 | ||||||
| Total revenue | 3,530,499 | 2,756,999 | ||||||
| OPERATING EXPENSES | ||||||||
| Cost of services | 73,004 | 75,378 | ||||||
| Professional services | 997,117 | 1,237,221 | ||||||
| Depreciation and amortization | 99,744 | 153,547 | ||||||
| Impairment of goodwill | – | 662,967 | ||||||
| General and administrative | 748,481 | 408,537 | ||||||
| Management fees - related party | 200,000 | 213,333 | ||||||
| Marketing | 375,499 | 402,402 | ||||||
| Salaries and wages | 1,961,126 | 1,730,278 | ||||||
| Total operating expenses | 4,454,971 | 4,883,663 | ||||||
| Net operating loss | (924,472 | ) | (2,126,664 | ) | ||||
| OTHER EXPENSE | ||||||||
| Interest expense | (51,503 | ) | (8,475 | ) | ||||
| Total other expense | (51,503 | ) | (8,475 | ) | ||||
| NET LOSS | $ | (975,975 | ) | $ | (2,135,139 | ) | ||
| LOSS PER SHARE - Basic and Diluted | $ | (0.03 | ) | $ | (0.07 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the years ended September 30, 2017 and 2016
| Number of Shares Issued and Outstanding | Common Stock Par Value Amount | Additional Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance at September 30, 2015 | 28,389,477 | $ | 28,389 | $ | 2,411,791 | $ | (943,884 | ) | $ | 1,496,296 | ||||||||||
| Common stock issued under a private placement memorandum | 785,000 | 785 | 534,215 | – | 535,000 | |||||||||||||||
| Common stock issued on acquisition of Tax Coach Software, LLC (shares placed in escrow) | 6,000,000 | 6,000 | 1,898,620 | – | 1,904,620 | |||||||||||||||
| Common stock surrendered by former officer | (2,926,294 | ) | (2,926 | ) | 2,926 | – | – | |||||||||||||
| Common stock held by Pacific Oil Company (reverse merger) | 2,614,717 | 2,615 | (101,671 | ) | – | (99,056 | ) | |||||||||||||
| Stock based compensation | – | – | 22,715 | – | 22,715 | |||||||||||||||
| Net loss | – | – | – | (2,135,139 | ) | (2,135,139 | ) | |||||||||||||
| Balance at September 30, 2016 | 34,862,900 | 34,863 | 4,768,596 | (3,079,023 | ) | 1,724,436 | ||||||||||||||
| Common stock issued under a private placement memorandum | 725,000 | 725 | 724,275 | – | 725,000 | |||||||||||||||
| Release of Pacific Oil Company shares for settlement of pre-acquisition liabilities | – | – | 23,674 | – | 23,674 | |||||||||||||||
| Common stock issued in exchange for services | 150,000 | 150 | 112,350 | – | 112,500 | |||||||||||||||
| Stock based compensation | – | – | 50,773 | – | 50,773 | |||||||||||||||
| Net loss | – | – | – | (975,975 | ) | (975,975 | ) | |||||||||||||
| Balance at September 30, 2017 | 35,737,900 | $ | 35,738 | $ | 5,679,668 | $ | (4,054,998 | ) | $ | 1,660,408 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (975,975 | ) | $ | (2,135,139 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 99,744 | 153,547 | ||||||
| Impairment of goodwill | – | 662,967 | ||||||
| Forfeiture of deposit for failed acquisition | – | 50,000 | ||||||
| Common stock issued in exchange for services | 112,500 | – | ||||||
| Stock based compensation | 50,773 | 22,715 | ||||||
| Changes in operating assets and liabilities, net of effects of purchase of subsidiaries | ||||||||
| Trade accounts receivable, net | (30,952 | ) | (22,420 | ) | ||||
| Accounts receivable - related party | – | 30,228 | ||||||
| Prepaid expenses | (32,364 | ) | (16,136 | ) | ||||
| Accounts payable - trade | 24,585 | (55,474 | ) | |||||
| Accounts payable - related party | – | (2,300 | ) | |||||
| Accrued expenses | 18,898 | (12,230 | ) | |||||
| Deferred revenue | 62,862 | 32,739 | ||||||
| Pre-merger payables | (75,382 | ) | – | |||||
| Net cash used in operating activities | (745,311 | ) | (1,291,503 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash from the sale of investment | 10,000 | – | ||||||
| Cash paid for purchase of property and equipment | (4,043 | ) | (65 | ) | ||||
| Cash acquired upon acquisition of subsidiaries | – | 57,025 | ||||||
| Payments for purchase of investment | – | (10,000 | ) | |||||
| Purchases of trademarks | (7,493 | ) | (2,419 | ) | ||||
| Net cash (used in) provided by investing activities | (1,536 | ) | 44,541 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Borrowings from line of credit | 42,377 | 24,391 | ||||||
| Borrowings from note payable | 450,000 | 26,086 | ||||||
| Payments on note payable | (96,804 | ) | (6,354 | ) | ||||
| Payments on line of credit | (62,109 | ) | (900 | ) | ||||
| Proceeds from the sale of common stock | 725,000 | 535,000 | ||||||
| Net cash provided by financing activities | 1,058,464 | 578,223 | ||||||
| TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 311,617 | (668,739 | ) | |||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 132,803 | 801,542 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 444,420 | $ | 132,803 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 48,586 | $ | 5,921 | ||||
| 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 | ||||
| Payables owed by Pacific Oil Company | $ | – | $ | (99,056 | ) | |||
| Equity in escrow to offset payables owed by Pacific Oil Company | $ | – | $ | 99,056 | ||||
| Settlement of payables owed by legacy Pacific Oil Company Stockholders | $ | 23,674 | $ | – | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
Financial Gravity Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Financial Gravity Companies, Inc. and Subsidiaries (the “Company”) is located in Allen, Texas. The wholly-owned subsidiaries of the organization include: Financial Gravity Holdings, Inc., Financial Gravity Operations, Inc., Financial Gravity Tax, Inc., Financial Gravity Wealth, Inc., Cloud9 Holdings Company, Financial Gravity Business, LLC, Financial Gravity Ventures, LLC., SASH Corporation (doing business as Metro Data Processing) and Tax Coach Software, LLC.
Financial Gravity Holdings, Inc. (“FGH”) was established on September 29, 2014 to engage in the acquisition and integration of financial and other businesses which will deliver a wide range of accounting, tax planning and management services to high net worth individuals and businesses in the Dallas/Fort Worth region, with further expansion into other markets in accordance with its long-term growth rate and strategic business plan.
Financial Gravity Operations, Inc. (“FGO”) was established as a wholly-owned subsidiary of FGH in Texas on September 29, 2014. FGO did not have any activity through September 30, 2014. Activity commenced in 2015 for FGO related to the management of operational expenses for the shared services of the subsidiaries.
Financial Gravity Business, LLC. (“FGB”) formerly Cloud9b2b, LLC (“Cloud9 B2B”) was acquired by Cloud9 Holdings Company effective December 31, 2014 and provides business consulting services to Small Business Owners that identify ways to leverage a business’ current assets (people, platforms and processes) and reduce exposure to risk, both short-term and long-term, while simplifying the business and increasing profitability. FGB does not have any financial activity through September 30, 2017.
Financial Gravity Ventures, LLC. (“FGV”) formerly Cloud9 Accelerator, LLC was acquired by Cloud9 Holdings Company (Cloud9) effective December 31, 2014 and holds acquired companies and business assets until they are integrated into the main stream Financial Gravity business structure. FGV did not have any financial activity through September 30, 2017.
Effective January 1, 2015, Cloud9 assigned 100% of the membership interest in Cloud9 Accelerator, LLC and Cloud9B2B, to FGO.
Financial Gravity Tax, Inc. (“FG Tax”) formerly Business Legacy, Inc., (“BLI”) was acquired by FGO for no cost effective January 1, 2015 and is located in Allen, Texas. BLI is a bookkeeping, tax planning, tax preparation, and payroll service provider to small companies and individuals.
Financial Gravity Wealth, Inc. (“FG Wealth”) formerly Pollock Advisory Group, Inc., (“PAG”) was acquired by FGO for no cost-effective January 1, 2015 and is a registered investment advisor, located in Allen, Texas. PAG provides asset management services.
SASH Corporation, an Oklahoma corporation doing business as Metro Data Processing (“MDP”) was acquired August 12, 2015. The purchase was made by Cloud9Accelerator, LLC. MDP is located in Tulsa, Oklahoma, and provides payroll services, software, and support solutions to business owners.
Tax Coach Software, LLC (“TCS”), was acquired effective October 1, 2015, and is an Ohio limited liability company. The purchase was made by FGH. TCS, located in Cincinnati, Ohio, provides three primary services including monthly subscriptions to the “Tax Coach” software system, coaching and email marketing services.
| F-7 |
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. The allowance for doubtful accounts was $17,014 and $-0- as of September 30, 2017 and 2016, respectively.
In the normal course of business, the Company may extend credit to its customers, on an unsecured basis, substantially all of whom are located in the United States of America. The Company does not believe that they are exposed to any significant risk of loss on accounts receivable.
Prepaid Expenses
Prepaid expenses consist of expenses the Company has paid for prior to the service or good being provided. These prepaid expenses will be recorded as expense at the time the service has been provided.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to earnings over their estimated service lives by the straight-line method.
Maintenance and repairs are charged to earnings as incurred; major repairs and replacements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
Property and equipment operated under material leases which transfer substantially all benefits and risks associated with the assets to the Company are capitalized. An asset and liability equal to the present or fair value, if appropriate, of minimum payments over the term of the leases are recorded. Amortization of the asset is computed using the straight-line method. Expenses associated with all other leases (operating leases) are charged to income as incurred.
Customer Relationships
The customer relationships acquired from the TCS purchase have been recognized in the accompanying consolidated balance sheets at $44,900, the value attributed to it on the date of the purchase (see Note 9). The customer relationships are being amortized on a straight-line basis over a four- year estimated life. During the years ended September 30, 2017 and 2016, the Company recorded amortization expense of $11,225 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at September 30, 2017 and 2016 was $22,450 and $11,225, respectively.
| F-8 |
Future amortization of customer relationships is estimated to be as follows for the years ended September 30:
| 2018 | $ | 11,225 | ||
| 2019 | 11,225 | |||
| $ | 22,450 |
Proprietary Content
The proprietary content acquired as a part of the TCS purchase has been recognized in the accompanying consolidated balance sheets at $525,100, the value attributed to it on the date of the purchase (see Note 9). The proprietary content is being amortized on a straight-line basis over an eight- year estimated life. During the years ended September 30, 2017 and 2016, the Company recorded amortization expense of $65,638 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at September 30, 2017 and 2016 was $131,276 and $65,638, respectively.
Future amortization of proprietary content is estimated to be as follows for the years ended September 30:
| 2018 | $ | 65,638 | ||
| 2019 | 65,638 | |||
| 2020 | 65,638 | |||
| 2021 | 65,638 | |||
| 2022 | 65,638 | |||
| Thereafter | 65,634 | |||
| $ | 393,824 |
Trade Name
The trade name acquired as a part of the TCS purchase has been recognized in the accompanying consolidated balance sheets at $69,300, the value attributed to it on the date of the purchase (see Note 9). Management has determined that the trade name has an indefinite life and does not consider the value of the trade name recorded in the accompanying consolidated balance sheet to be impaired as of September 30, 2017 and 2016.
Non-compete Agreements
Non-compete agreements established as a part of the TCS purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed to them on the date of the purchase (see Note 9). The non-compete agreements are being amortized on a straight-line basis over the five-year term of the non-compete clause of the agreement. During the years ended September 30, 2017 and 2016, the Company recorded amortization expense of $5,260 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at September 30, 2017 and 2016 was $10,520 and $5,260, respectively.
Future amortization of the non-compete agreements is estimated to be as follows for the years ended September 30:
| 2018 | $ | 5,260 | ||
| 2019 | 5,260 | |||
| 2020 | 5,260 | |||
| $ | 15,780 |
Trademarks
The Company accounts for trademarks in accordance with GAAP and accordingly, trademarks are stated at cost. Trademarks with indefinite lives are not amortized but are tested for impairment at least annually. Management has determined that the trademarks have an indefinite life and do not consider the value of trademarks recorded in the accompanying consolidated balance sheet to be impaired as of September 30, 2017 and 2016.
| F-9 |
Goodwill
Goodwill represents the excess of the value of the purchase price and related costs over the identifiable assets from business acquisitions. The Company conducts an annual impairment assessment, at the reporting unit level, of its recorded goodwill. The Company assesses qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative factors evaluated by the Company include: macro-economic conditions of the local business environment, overall financial performance, and other entity specific factors as deemed appropriate. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a two-step impairment test is performed. Management determined, by assessing the qualitative factors, that it is more likely than not that the fair value of the reporting unit is greater than its carrying value. Management does not consider the value of goodwill recorded for TCS in the accompanying consolidated balance sheet to be impaired as of September 30, 2017, and 2016. However, goodwill attributed to Cloud9 and MDP was deemed to be impaired as of September 30, 2016 as that business offering has been discontinued.
The fair values of the assets acquired, and liabilities assumed were determined primarily using the income approach, which determines the fair value for the asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The fair value of relationships were determined by projecting expected cash flows and subtracting the portion of the cash flow derived by the relevant contributory assets.
The accompanying consolidated balance sheets, consolidated statements of operations, changes in stockholders’ equity and cash flows include the results of operations of the acquired subsidiaries from the date of acquisition.
Goodwill consists of the following:
| Goodwill at September 30, 2015 | $ | 662,967 | ||
| Goodwill generated from acquisition of TCS | 1,094,702 | |||
| Impairment of Cloud9 | (592,369 | ) | ||
| Impairment of MDP | (70,598 | ) | ||
| Goodwill at September 30, 2016 | 1,094,702 | |||
| Goodwill at September 30, 2017 | $ | 1,094,702 |
Income Taxes
The Company accounts for Federal and state income taxes pursuant to GAAP, which requires an asset and liability approach for financial accounting and reporting for income taxes based on tax effects of differences between the financial statement and tax basis of assets and liabilities.
The Company accounts for all uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 – Income Taxes (“ASC 740”). ASC 740 provides guidance on de-recognition, classification, interest and penalties and disclosure related to uncertain income tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no accrued interest or penalties as of September 30, 2017 and 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.
Earnings Per Share
Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Average number of common shares were 35,361,321 and 31,626,189 for years ended September 30, 2017 and 2016, respectively.
For the years ended September 30, 2017 and 2016, approximately 2,817,146 and 2,200,346 common stock options, respectively, were not added to the diluted average shares because inclusion of such shares would be antidilutive.
| F-10 |
Revenue Recognition
FG Wealth generates investment management fees for services provided by the Company. Investment management fees include fees earned from
assets under management by providing professional services to manage client investments.
FG Tax and MDP generate service income from its consulting and other professional services performed.
Commission revenue is derived from the sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy is issued.
Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets.
TaxCoach Software has 3 types of services that are charged and collected on a month to month subscription basis (TaxCoach basic membership, All-Stars coaching, and Wire Service weekly broadcast email). None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships.
Advertising
Advertising costs are charged to operations when incurred. Advertising and marketing expense was $375,499 and $402,402 for the years ended September 30, 2017 and 2016, 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 0.85% to 1.41% in 2017 and 0.97% in 2016, dividend yield of 0%, expected life of 2 years and volatility of 43% to 137%.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand.
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 contemplates a series of transactions, pursuant to which the Company will “put” shares of its common stock to GHS in consideration of the payment to the Company of eighty percent (80%) of the “Market Price” of such shares. “Market Price” shall mean the average of the two lowest trading prices of the Company’s Common Stock during the ten (10) consecutive trading days preceding the receipt of the applicable put notice. Accordingly, on each instance the Company exercises a put option, the Company will know in advance, both the number of shares issuable upon exercise of the put option, and the dollar amount of the purchase price for such shares. The maximum purchase price for shares to be purchased by GHS Investments under the Agreement is $11,000,000. To facilitate the sale of the shares so purchased by GHS Investments, the Company agreed to file a registration statement with the Securities and Exchange Commission. The Company also entered into a Registration Rights Agreement with GHS Investments, pursuant to which the Company has agreed to provide certain registration rights under the Securities Act of 1933, the rules and regulations promulgated thereunder, and applicable state securities laws. 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.
| F-11 |
Additionally, the Company is also 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 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 financial 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. The Company does not expect any significant financial impact to the financial statements upon adoption of this standard.
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 financial 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. The Company does not expect any significant financial impact to the financial statements upon adoption of this standard.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30:
| Estimated Service Lives | 2017 | 2016 | ||||||||
| Furniture, fixtures and equipment | 2 to 5 years | $ | 11,039 | $ | 6,994 | |||||
| Internally developed software | 10 years | 152,000 | 152,000 | |||||||
| 163,039 | 158,994 | |||||||||
| Less accumulated depreciation and amortization | 35,536 | 17,914 | ||||||||
| $ | 127,503 | $ | 141,080 | |||||||
Depreciation expense was $17,622 and $17,625 during the years ended September 30, 2017 and 2016, respectively.
| F-12 |
3. TRADEMARKS
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 | 7,493 | |||
| Trademarks at September 30, 2017 | $ | 30,085 |
4. LINE OF CREDIT
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 $0 and $19,732 for the years ended September 30, 2017 and 2016, respectively.
5. NOTES PAYABLE
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 2018 (paid off on November 30, 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 $92,197 and $93,397 at September 30, 2017 and 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 $7,935 and $0 at September 30, 2017 and 2016, respectively.
On July 31, 2017, the Company entered into a Promissory Note Payable with Fourly Enterprises, LLC (“Fourly”) in the amount of $50,000. The interest rate on the note is 20%. The note matures on August 16, 2018. Fourly is owned by the majority stockholder of the Company. The outstanding balance was $46,461 at September 30, 2017.
On August 9, 2017 the Company entered into a Promissory Note Payable with Elmer Fink in the amount of $100,000. The interest rate on the note is 10%. The note matures July 31, 2020. The outstanding balance was $100,000 at September 30, 2017.
On August 9, 2017 the Company entered into a Promissory Note Payable with Mike and Terri Ashby in the amount of $100,000. The interest rate on the note is 10%. The note matures August 15, 2020. The outstanding balance was $100,000 at September 30, 2017.
On September 5, 2017 the Company entered into a Promissory Note Payable with Heleon Investment Company, Ltd. in the amount of $100,000. The interest rate on the note is 10%. The note matures August 15, 2020. The outstanding balance was $100,000 at September 30, 2017.
The Company’s maturities of debt subsequent to September 30, 2017 are as follows:
| 2018 | $ | 165,562 | ||
| 2019 | 144,524 | |||
| 2020 | 136,507 | |||
| $ | 446,593 |
| F-13 |
6. ACCRUED EXPENSES
Accrued expenses consist of the following at September 30:
| 2017 | 2016 | |||||||
| Accrued payroll | $ | 19,165 | $ | 44,327 | ||||
| Accrued operating expenses | 103,137 | 59,077 | ||||||
| Deferred rent | 250 | 250 | ||||||
| $ | 122,552 | $ | 103,654 | |||||
7. INCOME TAXES
The Company elected C Corporation tax status upon inception in 2014. Net operating losses (“NOL”) since that date total $3,233,265 as of September 30, 2017 and may be carried forward to offset future taxable income; accordingly, no current provision for income tax has been recorded in the accompanying statements of operations. NOL carry-forward benefits begin to expire in 2035.
The following table summarizes the difference between the actual tax provision and the amounts obtained by applying the statutory tax rates to the income or loss before income taxes for the years ended September 30:
| 2017 | 2016 | |||||||
| Tax benefit calculated at statutory rate | 35.00% | 35.00% | ||||||
| Expense not deductible | (0.37 | ) | (0.19 | ) | ||||
| Merger costs | – | (1.64 | ) | |||||
| Impairment of goodwill | – | (10.87 | ) | |||||
| Changes to valuation allowance | (34.63 | ) | (22.30 | ) | ||||
| Provision for income taxes | – % | – % | ||||||
A deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit in the accompanying consolidated statements of operations are the result of changes in the assets and liabilities for deferred taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount for any tax benefits that, based on available evidence, are not expected to be realized. Income tax expense is the current tax payable or refundable for the year plus or minus the net change in the deferred tax assets and liabilities. Deferred income taxes of the Company arise from the temporary differences between financial statement and income tax recognition of NOL carry-forwards.
The deferred tax assets and liabilities in the accompanying consolidated balance sheets include the following components at September 30:
| 2017 | 2016 | |||||||
| Net non-current deferred tax assets: | ||||||||
| Net operating loss carry-forward | $ | 1,131,643 | $ | 799,254 | ||||
| Property and equipment | 10,719 | 4,627 | ||||||
| 1,142,362 | 803,881 | |||||||
| Net non-current deferred tax liabilities: | ||||||||
| Intangible assets | 728 | 303 | ||||||
| Net | 1,141,634 | 803,578 | ||||||
| Less valuation allowance | (1,141,634 | ) | (803,578 | ) | ||||
| Net deferred taxes | $ | – | $ | – | ||||
| F-14 |
8. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Leases
The Company conducts operations from leased premises. Some of these leases provide for payment of taxes, insurance, utilities and maintenance. The Company also leases certain equipment under operating leases. Total rent expense for the years ended September 30, 2017 and 2016 was $102,960 and $89,150, 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.
Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows:
| 2018 | $ | 68,400 | ||
| 2019 | 5,700 | |||
| $ | 74,100 |
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. One agreement with one of the employees was terminated during December 2016 (See Note 9).
At September 30, 2016, Pacific Oil Company had some outstanding payables that the previous owners were in the process of liquidating. Those liabilities have been shown here but are expected to be settled by the previous owners. Shares of the Company were held in escrow to cover the possibility that these liabilities will ultimately have to be settled by the Company. The liabilities were settled during 2017.
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.
9. BUSINESS ACQUISITIONS
Business Acquisition – Tax Coach Software, Inc.
Effective October 1, 2015, the Company completed the acquisition of Tax Coach Software, LLC, an Ohio limited liability company (“Tax Coach Software”). The purchase was made by Financial Gravity Holdings, Inc. Under the terms of the acquisition, the Company acquired 100% of Tax Coach Software’s stock in a stock exchange. Total stock exchanged was 6,000,000 shares (as amended), at par value of $0.001 per share, from the Company for 100% of the shares of Tax Coach Software. Goodwill, as a result of this acquisition, is not deductible for tax purposes.
Certificates representing the shares were required to be deposited in escrow as of the effective date of the acquisition. As part of the purchase agreement documentation, the Sellers maintained the right to unwind the transaction under certain conditions as described. The Sellers also retained all rights as shareholders while shares were held in escrow, including the right to vote. Under the escrow agreement, if the average daily closing price of the shares for any continuous 10-day trading period equals or exceeds $1.00 during the thirty-six months following October 28, 2015, the Company had the right to cause the shares deposited in escrow to be distributed to the Sellers, terminating any right to unwind the transaction. If the shares did not trade as to provide a closing price during the thirty-six months following October 28, 2015 or if the average daily closing price of the shares for any continuous 10-day trading period failed to equal or exceed $1.00 during the thirty-six months following October 28, 2015, then no later than five days following the conclusion of the thirty-six month period, the Sellers would have the right to unwind the acquisition of Tax Coach Software by the Company and the Company would immediately transfer the ownership of Tax Coach Software back to the Sellers in exchange for the return of common stock issued during the acquisition. The closing price was defined as the last closing trade price for the shares on an electronic bulletin board as reported by Bloomberg or on the NASDAQ Capital Market or the highest bid price as reported on “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If listed for trading on the American or New York Stock Exchange during the thirty-six months following October 28, 2015 it will be deemed to meet the $1.00 benchmark.
| F-15 |
On November 11, 2016, the parties to the escrow agreement agreed (in a Company Distribution Notice) that the average daily closing price of the shares had exceeded the $1.00 threshold and accordingly, the shares were released from escrow and the right to unwind the Tax Coach Software acquisition transaction terminated.
Three employment agreements were made as a condition to the acquisition. Each agreement has an effective date as of November 1, 2015 and is effective for a period of three years. Two employee agreements include a base salary of $42,000 per year, per employee. These same two agreements, include a bonus that is calculated, for each employee, as the sum of 40% of the gross profit of Tax Coach Software for all revenues that exceed $850,000 and are less than $950,000 and 20% of the gross profit of Tax Coach Software for all revenues earned in excess of $950,000. One employee agreement includes a base salary of $60,000 per year. This same agreement, includes a bonus that is calculated as the sum of 20% of the gross profit of Tax Coach Software for all revenues that exceed $850,000 and are less than $950,000 and 10% of the gross profit of Tax Coach Software for all revenues earned in excess of $950,000. Gross profit is determined in accordance with generally acceptable accounting principles, net of other amounts paid under employment and consulting agreements. The agreements also include other certain termination and non-compete clauses. Compensation during the month of October 2015 to be paid to the three employees totals an aggregate amount of $49,150. Three consulting agreements were made as a condition to the acquisition. Two agreements require certain services at a fixed fee of $17,000 per month, per agreement, commencing on November 1, 2015 with a 90-day termination clause. One agreement was terminated by the Company during December 2017. 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. $444,600 and $444,650 in professional fees were paid under these 3 agreements during the years ended September 30, 2017 and 2016, respectively.
Tax Coach Software, located in Cincinnati, Ohio, provides three primary services including monthly subscription revenue from the “Tax Coach” software system, coaching revenue and email marketing services for customers.
The transaction resulted in a fair value of the acquisition of $1,094,702 as follows:
| Common stock issued in stock exchange at a value of $0.25 per share (as amended) | $ | 1,500,020 | ||
| Additional paid in capital for the escrow agreement provision | 404,600 | |||
| Total value of the goodwill generated on acquisition | 1,904,620 | |||
| Intangible assets acquired | (719,400 | ) | ||
| Net tangible assets acquired | (90,518 | ) | ||
| Total assets acquired | (809,918 | ) | ||
| Total fair value of acquisition | $ | 1,094,702 |
The intangible assets were as follows:
| Customer relationships | $ | 44,900 | ||
| Proprietary content | 525,100 | |||
| Trade name | 69,300 | |||
| Prospect list | 53,800 | |||
| Non-compete agreements | 26,300 | |||
| Total intangible assets | $ | 719,400 |
The tangible assets acquired and liabilities assumed were as follows:
| Assets acquired: | ||||
| Cash | $ | 57,025 | ||
| Accounts receivable | 15,476 | |||
| Accounts receivable - other | 5,408 | |||
| Internally developed software | 152,000 | |||
| Total tangible assets | 229,909 | |||
| Liabilities assumed: | ||||
| Accrued expenses | 69,485 | |||
| Line of credit | 69,906 | |||
| Total liabilities | 139,391 | |||
| Net acquired assets | $ | 90,518 | ||
| F-16 |
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.
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.
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, there were no preferred shares issued or outstanding as of September 30, 2017 and 2016.
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. In the quarter ended March 31, 2017 there were two individual investments for an aggregate of $250,000 for which the Company issued warrants for the purchase of 50,000 shares of common stock of the Company at an exercise price of $1.25 per share for a 1-year term and an additional 50,000 shares of common stock of the Company at an exercise price of $1.50 for a 2-year term. In the quarter ended September 30, 2017, there was one additional investment of $100,000 for which the Company issued warrants for the purchase of 25,000 shares of common stock of the Company after exercise price of $1.25 per share for 1-year term and an additional 25,000 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, Inc.
On October 31, 2014, Financial Gravity Holdings, Inc. 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.
Additional Common Stock Issuances, Financial Gravity Companies, Inc.
On April 1, 2017, the Company entered into an agreement with FMW Media Works Corp (“FMW”), wherein FMW would provide television, production, and media analysis to the Company. The Company issued 50,000 shares of common stock, worth $52,500, to FMW along with $3,500 cash as payment for services.
| F-17 |
On August 22, 2017, the Company issued 100,000 shares of common stock, worth $60,000 to Nationwide EZ Cash Flow in exchange for professional services.
During the years ended September 30, 2017 and 2016, 725,000 shares and 785,000 shares, respectively, were issued for $725,000 and $535,000, respectively.
Additional Common Stock Issuances, Financial Gravity Holdings, Inc.
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.
During the year ended September 30, 2016, Financial Gravity Holdings sold 350,000 shares of common stock.
Stock Split, Financial Gravity Holdings
Effective October 20, 2015, Financial Gravity Holdings declared a three for one stock split of its common stock. Upon the stock split, every one share of common stock issued and outstanding was automatically reclassified and converted into three shares of common stock. The common stock retained a par value of $0.00001 per share.
11. STOCK OPTION PLAN
Effective February 27, 2015, the Company established the 2015 Stock Option Plan (the “2015 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. The maximum number of shares of stock that may be issued and exercised under the Plan is 9,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. The last date any options were granted under the 2015 Plan was March 14, 2016.
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 and exercised under the 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. The first date any options were granted under the 2016 Plan was December 19, 2016.
Stock option activity is summarized as follows:
| 2017 | 2016 | |||||||||||||||||||||||||||||||
| Shares Under Option | Value of Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Shares Under Option | Value of Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |||||||||||||||||||||||||
| Outstanding - beginning of year | 2,200,346 | $ | 22,129 | $ | 0.64 | 1,500,996 | $ | 7,359 | $ | 0.33 | ||||||||||||||||||||||
| Granted | 661,400 | 323,927 | 0.78 | 116 months | 1,024,400 | 19,677 | 1.00 | 111 months | ||||||||||||||||||||||||
| Exercised | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Canceled or expired | 44,600 | 28,495 | 1.00 | – | 325,050 | 4,907 | 0.33 | – | ||||||||||||||||||||||||
| Outstanding - end of year | 2,817,146 | $ | 317,561 | $ | 0.67 | 101 months | 2,200,346 | $ | 22,129 | $ | 0.64 | 109 months | ||||||||||||||||||||
| Exercisable - end of year | 2,276,813 | $ | 0.65 | 97 months | 2,200,346 | $ | 0.64 | 109 months | ||||||||||||||||||||||||
All outstanding 2015 Plan stock options at September 30, 2016 became immediately vested upon the completion of the reverse merger with Pacific Oil Company. Most of the stock options granted under the 2016 Plan have 2-year vesting periods but there were 20,000 options that vested at issuance. Total compensation expense included in salaries and wages of previously unamortized stock compensation was $50,773 and $22,715 for the years ended September 30, 2017 and 2016, respectively. Unamortized share-based compensation expense as of September 30, 2017 amounted to $249,033 which is expected to recognized over the next 2 years.
| F-18 |
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 $4,506 as of September 30, 2017, and 2016.
Management fees paid to the majority stockholder of the entity, included as management fees - related party in the accompanying consolidated statements of operations were $200,000 and $213,333 for fiscal 2017, and 2016.
During the year ended September 30, 2016, a board member who is also a stockholder provided services to the Company. Expenses for these services totaled $49,000 and were included as general and administrative expenses in the accompanying consolidated statement of operations. There were no associated expenses during 2017.
On July 31, 2017, the Company entered into a Promissory Note Payable with Fourly Enterprises, LLC (“Fourly”) in the amount of $50,000. The interest rate on the note is 20%. The note matures on August 16, 2018. Fourly is owned by the majority stockholder of the Company. The outstanding balance was $46,461 at September 30, 2017.
13. SUBSEQUENT EVENTS
Subsequent to September 30, 2017, an aggregate of 100,000 shares of the Company’s common stock have been sold for $100,000. Additionally, an aggregate of 50,000 warrants to purchase the Company’s common stock have been issued in conjunction with the sale of the Company’s common stock.
Subsequent to September 30, 2017, an aggregate of 375,500 options to purchase the Company’s common stock have been granted.
On November 30, 2017, the Company paid off the remaining balance of the note payable to The Huntington National Bank.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into United States tax law, which among other provisions will lower the corporate tax rate to 21%. Given this date of enactment, our financial statements as of and for the year ended September 30, 2017 do not reflect the impact of the Act. The Company is in the process of analyzing the potential aggregate impact of the Act and will reflect any such impact in the quarterly report for the period in which the law was enacted.
| F-19 |