Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION - Financial Gravity Companies, Inc. | fingravity_ex3201.htm |
| EX-31.2 - CERTIFICATION - Financial Gravity Companies, Inc. | fingravity_ex3102.htm |
| EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - Financial Gravity Companies, Inc. | fingravity_ex3101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2020
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Financial Gravity Companies, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 001-34770 | 20-4057712 |
| (State or other jurisdiction of incorporation or organization) |
(Commission File No.) |
(IRS Employee Identification No.) |
12600 Hill Country Blvd Suite R-275, Bee Cave, TX 78738
(Address of Principal Executive Offices)
800-588-3893
(Issuer Telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol | Name of each exchange on which registered |
| N/A | N/A |
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [_] | Accelerated filer [_] | |
| Non-accelerated filer [X] | Smaller reporting company [X] | |
| Emerging growth company [_] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes [_] No [X]
The number of shares outstanding of the registrant’s Common Stock as of May 15, 2020 was 41,524,589.
FINANCIAL GRAVITY COMPANIES, INC.
FORM 10-Q
| 2 |
PART I - FINANCIAL INFORMATION
Financial Gravity Companies, Inc. and Subsidiaries
| March 31, 2020 | September 30, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 22,579 | $ | 36,053 | ||||
| Trade accounts receivable, net | 113,000 | 147,377 | ||||||
| Prepaid expenses and other current assets | 36,646 | 12,010 | ||||||
| Total current assets | 172,225 | 195,440 | ||||||
| OTHER ASSETS | ||||||||
| Property and equipment, net | 130,066 | 139,991 | ||||||
| Right to use lease asset | 277,731 | – | ||||||
| Proprietary content, net | 229,732 | 262,550 | ||||||
| Non-compete agreements, net | 2,630 | 5,260 | ||||||
| Intellectual property | 53,170 | 53,170 | ||||||
| Goodwill | 1,094,702 | 1,094,702 | ||||||
| TOTAL ASSETS | $ | 1,960,256 | $ | 1,751,113 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable - trade | $ | 177,596 | $ | 93,999 | ||||
| Related party payables | 129,965 | 88,276 | ||||||
| Accrued expenses and other current liabilities | 113,654 | 146,872 | ||||||
| Contract liabilities | 63,931 | 94,733 | ||||||
| Line of credit | 60,185 | 63,919 | ||||||
| Lease Liability | 84,497 | – | ||||||
| Notes payable | 6,045 | 5,867 | ||||||
| Total current liabilities | 635,873 | 493,666 | ||||||
| Notes payable - net of current | 20,466 | 23,534 | ||||||
| Lease liability - non-current | 207,590 | – | ||||||
| Total non-current liabilities | 228,056 | 23,534 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value; 300,000,000 shares authorized; 41,524,589 shares issued and outstanding as of March 31, 2020 and 41,436,033 shares issued and outstanding as of September 30, 2019 | 41,525 | 41,436 | ||||||
| Additional paid-in capital | 7,425,269 | 7,391,592 | ||||||
| Accumulated deficit | (6,370,467 | ) | (6,199,115 | ) | ||||
| Total stockholders’ equity | 1,096,327 | 1,233,913 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,960,256 | $ | 1,751,113 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Financial Gravity Companies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| For the | For the | For the | For the | |||||||||||||
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Total Revenue | ||||||||||||||||
| Investment Management Fee | $ | 339,696 | $ | 459,278 | $ | 747,716 | $ | 776,708 | ||||||||
| Service Income | 276,984 | 701,978 | 561,039 | 1,278,813 | ||||||||||||
| Total Revenue | 616,680 | 1,161,256 | 1,308,755 | 2,055,521 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Cost of services | 14,646 | 15,505 | 26,657 | 29,310 | ||||||||||||
| Professional services | 70,646 | 26,825 | 186,979 | 332 | ||||||||||||
| Depreciation and amortization | 21,785 | 99,500 | 47,807 | 128,600 | ||||||||||||
| General and administrative | 85,903 | 124,441 | 181,812 | 271,466 | ||||||||||||
| Marketing | 13,472 | 29,971 | 34,585 | 61,573 | ||||||||||||
| Salaries and wages | 570,209 | 1,129,070 | 1,149,020 | 1,990,446 | ||||||||||||
| Total Operating Expenses | 776,661 | 1,425,312 | 1,626,860 | 2,481,727 | ||||||||||||
| Operating Loss | (159,981 | ) | (264,056 | ) | (318,105 | ) | (426,206 | ) | ||||||||
| Other income | – | – | 150,548 | – | ||||||||||||
| Interest expense | (2,126 | ) | (51,967 | ) | (3,795 | ) | (94,064 | ) | ||||||||
| Total other (expense) income | (2,126 | ) | (51,967 | ) | 146,753 | (94,064 | ) | |||||||||
| Net Loss | $ | (162,107 | ) | $ | (316,023 | ) | $ | (171,352 | ) | $ | (520,271 | ) | ||||
| Loss Per Share - Basic and Diluted (1) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | (1) | $ | (0.01 | ) | |||
__________________
(1) Earnings per share amount is rounded up to $(0.01)
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
| Number of Shares Issued and Outstanding | Common Stock Par Value Amount | Additional Paid-In-Capital | Accumulated Deficit | Total | |||||||||||||||
| Balance at September 30, 2018 | 35,837,900 | $ | 35,838 | $ | 5,986,052 | ($ | 5,575,630 | ) | $ | 446,260 | |||||||||
| Stock based employee compensation expense | 500,000 | 500 | 196,844 | – | 197,344 | ||||||||||||||
| Net loss | – | – | – | (520,271 | ) | (520,271 | ) | ||||||||||||
| Balance at March 31, 2019 | 36,337,900 | 36,338 | 6,182,896 | (6,095,901 | ) | 123,333 | |||||||||||||
| Balance at September 30, 2019 | 41,436,033 | $ | 41,436 | $ | 7,391,592 | ($ | 6,199,115 | ) | $ | 1,233,913 | |||||||||
| Stock based employee compensation expense | – | – | 8,766 | – | 8,216 | ||||||||||||||
| Stock options exercised | 12,799 | 13 | (13 | ) | – | 550 | |||||||||||||
| Private Placement stock issue | 75,757 | 76 | 24,924 | 25,000 | |||||||||||||||
| Net loss | – | – | – | (171,352 | ) | (171,352 | ) | ||||||||||||
| Balance at March 31, 2020 | 41,524,589 | $ | 41,525 | $ | 7,425,269 | ($ | 6,370,467 | ) | $ | 1,096,327 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 2020
(Unaudited)
| Six Months Ended | Six Months Ended | |||||||
| March 31,2020 | March 31,2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (171,352 | ) | $ | (520,271 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 47,807 | 128,600 | ||||||
| Stock based compensation | 16,251 | 197,344 | ||||||
| Right of use lease asset | 45,366 | – | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | 34,377 | 3,224 | ||||||
| Accounts receivable - related party | – | 1,791 | ||||||
| Prepaid expenses | (24,636 | ) | 5,615 | |||||
| Accounts payable - trade and related party payables | 125,286 | 132,368 | ||||||
| Accrued expenses and other liabilities | (26,346 | ) | 58,191 | |||||
| Lease Liability | 45,366 | – | ||||||
| Contract Liabilities | (30,802 | ) | – | |||||
| Net cash provided by (used in) operating activities | (29,415 | ) | 6,862 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (2,434 | ) | (29,006 | ) | ||||
| Purchase of trademark | – | (875 | ) | |||||
| Net cash used in investing activities | (2,434 | ) | (29,881 | ) | ||||
| Cash flows from financing activities | ||||||||
| Borrowings from notes payable | – | 155,000 | ||||||
| Borrowings from line of credit | 3,261 | – | ||||||
| Payments on line of credit | (6,996 | ) | (6,742 | ) | ||||
| Payments on notes payable | (2,890 | ) | (152,373 | ) | ||||
| Proceeds from sale of common stock | 25,000 | – | ||||||
| Net cash provided by (used in) financing activities | 18,375 | (4,115 | ) | |||||
| Net decrease in cash and cash equivalents | (13,474 | ) | (27,134 | ) | ||||
| Cash and cash equivalents at beginning of period | 36,053 | 32,220 | ||||||
| Cash and cash equivalents at end of period | $ | 22,579 | $ | 5,086 | ||||
| Cash Paid for Interest | $ | 3,795 | $ | 82,633 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
Financial Gravity Companies, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Financial Gravity Companies, Inc. is a parent company of financial services companies including brokerage, wealth management, estate planning, family office services, investment risk management, business and personal tax planning, business consulting, and financial advisor services. Financial Gravity's mission is to bring together financial services companies that create comprehensive customer service synergies for the clients that we serve.
Financial Gravity Companies, Inc., and subsidiaries (the “Company”) is headquartered in Austin Texas, with locations in Allen, Texas and Cincinnati, Ohio. The currently operating wholly-owned subsidiaries of the organization include:
Sofos Investments, Inc. (formerly, Financial Gravity Wealth, Inc.) (“Sofos”) Sofos is a registered investment advisor (“RIA”), registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses, including financial planning, wealth management and money management.
Tax Master Network, LLC, runs the Tax Master Network® (“TMN”) that provides four primary services including monthly subscriptions to the TMN systems, coaching and email marketing services. TMN currently supports over 300 Certified Public Accountants (“CPA”) and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. TMN has developed the Certified Tax Master® for this group and includes client acquisition and retention systems. TMN also offers tax planning services through the Tax Blueprint®, which includes an extensive review of the client’s tax needs. The initial assessment sets the requirements for a custom Tax Blueprint® for each client to use as guide to implementation of the identified tax savings strategies. Finally, TMN offers the Tax Operating System, which is a system for integrating and executing tax planning strategies.
MPath Advisor Resources, LLC (formerly Financial Gravity Business, LLC.) (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.
Inactive subsidiaries include Financial Gravity Holdings, Inc. (dissolved February 13, 2019), Financial Gravity Operations, Inc. (dissolved February 12, 2019), Financial Gravity Tax, Inc (a small bookkeeping and payroll service businesses that was sold in October 2019, and SASH Corporation (inactive).
On September 30, 2019, the Company entered into an agreement to acquire 100% of the shares of stock of Presidential Brokerage, Inc, a California corporation. Subsequent to the entering into the agreement, Presidential changed its name to Forta Financial Group, Inc. (“Forta”). Upon completion of the acquisition of the Forta stock, Forta will become a wholly owned subsidiary of the Company. Forta is a broker-dealer, a registered investment advisor, and a licensed insurance agent. It primarily operates in Colorado. The merger was approved by FINRA on April 27, 2020. Management believes that the acquisition of Forta will be finalized prior to June 1, 2020.
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
A summary of the significant accounting polices consistently applied in the preparation of the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is as follows.
Basis of Consolidation
The consolidated financial statements include the accounts of its subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation.
| 7 |
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.
Receivables
Trade accounts receivable are carried at the invoiced amount less an estimate made for doubtful accounts based on management’s review of outstanding balances. The collectability of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and a review of specific accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted and when management determines the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when received. The allowance for doubtful accounts was $0 as of March 31, 2020 and September 30, 2019, respectively.
In the normal course of business, the Company may extend credit to its customers, on an unsecured basis, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
Prepaid Expenses
Prepaid expenses consist of expenses the Company has paid for prior to the service or good being provided. These prepaid expenses will be recorded as expense at the time the service has been provided.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to earnings over their estimated service lives by the straight-line method.
Maintenance and repairs are charged to earnings as incurred; major repairs and replacements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
Leases
In February 2016, the FASB issued ASU 2016-02 Leases, which changed financial reporting as it relates to leasing transactions to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. In July 2018, the FASB issued ASU No. 2018-10 Codification Improvements to Topic 842, Leases and ASU No. 2018-11 Leases (Topic 842): Targeted Improvements. In March 2019, the FASB issued ASU No. 2019-1 Codification Improvements to Topic 842, Leases. The Company adopted these ASUs on October 1, 2019 on a modified retrospective basis. The Company did not elect the hindsight practical expedient and did elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases. The initial adoption of the standard recognized right-of-use assets of $323,097 and lease liabilities of $337,454 on the Company’s statement of financial position with no impact on the Company's results of operations. The Company had no significant changes to processes or controls.
The Company leases all their office space through an operating lease, which expires at January 31, 2024. Many of the lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term. Lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses.
| 8 |
Proprietary Content
The proprietary content acquired as a part of the TMN purchase has been recognized in the accompanying consolidated balance sheets at $525,100, the value attributed to such content on the date of the purchase. The proprietary content is being amortized on a straight-line basis over an eight-year estimated life. During each of the three months ended March 31, 2020 and 2019, and the six months ended March 31, 2020 and 2019, the Company recorded amortization expense of $16,410 and $32,818 respectively, on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at March 31, 2020 was $295,368 and $262,550 at September 30, 2019.
Non-compete Agreements
Non-compete agreements entered into as a part of the TMN purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed to such agreements on the date of the purchase. The non-compete agreements are being amortized on a straight-line basis over the five-year term of the non-compete clause of the agreement. During each of the three and six months ended March 31, 2020 and 2019, the Company recorded amortization expense of $1,315 and $2,630 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at March 31, 2020 was $23,670 and $21,040 at September 30,2019.
Intellectual Property
Intellectual property is stated at cost. Intellectual property with indefinite lives are not amortized but are tested for impairment at least annually. Management has determined that the intellectual property have an indefinite life and do not consider the value of intellectual property recorded in the accompanying consolidated balance sheets to be impaired as of March 31, 2020 and September 30, 2019.
Goodwill
Goodwill represents the excess of the value of the purchase price and related costs over the identifiable assets from business acquisitions. The Company conducts an annual impairment assessment, at the reporting unit level, of its recorded goodwill. The Company assesses qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than it is carrying amount. The qualitative factors evaluated by the Company include macro-economic conditions of the local business environment, overall financial performance, and other entity specific factors as deemed appropriate. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than it is carrying amount, a two-step impairment test is performed. Management determined, by assessing the qualitative factors, that it is more likely than not that the fair value of the reporting unit is greater than it carries value. Management does not consider the value of goodwill recorded for TMN in the accompanying consolidated balance sheets to be impaired as of March 31, 2020 and September 30, 2019.
Income Taxes
The Company records federal and state income, which requires an asset and liability approach for financial accounting and reporting for income taxes based on tax effects of differences between the financial statement and tax basis of assets and liabilities.
The Company accounts for all uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 – Income Taxes (“ASC 740”). ASC 740 provides guidance on de-recognition, classification, interest and penalties and disclosure related to uncertain income tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no accrued interest, penalties or uncertain tax positions as of March 31, 2020 and September 30, 2019.
| 9 |
From time to time, the Company is audited by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes. The Company’s Federal returns since 2016 are still subject for examination by taxing authorities.
Earnings Per Share
Basic loss per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Average number of common shares were 41,524,589 and 35,837,900 for the quarters ended March 31, 2020 and 2019, respectively. Average number of common shares were 41,495,070 and 35,837,900 for the six months ended March 31, 2020 and 2019, respectively. For the three and six months ended March 31, 2020, approximately 6,512,035 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. For the three and six months ended March 31, 2019, approximately 3,940,326 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive.
Revenue Recognition
The Company derives its revenues primarily from: Investment Management Fees, TMN subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, Insurance Sales and Marketing Programs, and Tax Operating System subscriptions.
Sofos generates investment management fees by providing professional services to manage client investments. Investment management fees are calculated as a percentage of assets under management for the period. Investment management fees Revenue is recognized as earned, at the end of each period. Fees are withdrawn from investor accounts monthly, in arrears.
Revenue is also derived from the sale of annuities and premiums on life insurance policies issued by insurance companies to investment clients, and from insurance marketing programs (through MPath Advisor Resources, LLC.). The revenue is recognized after the insurance polies are issued and in force.
Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as Contract Liabilities in the accompanying consolidated balance sheets.
TMN has several levels of subscription services that are charged and collected on a month to month basis. None of these services comes with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up. Cancellations are processed within the month requested and subscriptions are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are tax planning strategies guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings, up to $10,000. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Tax Blueprint® sales are billed to the client after a preliminary assessment and client approval to move forward. Revenue recognized in 2020 that is included in Contract Liabilities as of September 30, 2019 is $61,400.
Advertising
Advertising costs are charged to operations when incurred. Advertising and marketing expense were $13,472 and $29,971 for the three months ended March 31, 2020 and 2019, respectively and $34,585 and $61,615 for the six months ended March 31, 2020 and 2019 respectively.
Stock-Based Compensation
The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations for employee grants, commissions for non-employee grants, and stock appreciation rights grants, on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rate of 1.56% in the quarter ended March 31, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 7 years and volatility of 100% in 2020 and volatility of 35% to 40% in 2019.
| 10 |
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Adjustments
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended September 30, 2019, included in its Annual Report on Form 10-K.
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. Company has not had to use this as a source of funding and expects it to expire with no impact on the Company’s operations. See Subsequent Events - Paycheck Protection Program.
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, will pursue raising additional capital through sales of common stock as well as seeking financing via equity or debt, or both from third parties. There are no assurances that additional financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead expenditures. The failure to adequately fund its capital requirements could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s stockholders and incurring additional indebtedness could involve an increased debt service cash obligation, the imposition of covenants that restrict the Company’s operations or the Company’s ability to perform on its current debt service requirements. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
| 11 |
Future Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses, which amends how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, which applies to trade accounts receivable and the calculation of the allowance for uncollectible accounts receivable. The new standard will become effective for the Company for fiscal years beginning after December 31, 2019, with early adoption permitted. In November of 2019, the FASB issued ASU 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which deferred the effective date of ASU Topic No. 2016-13 to fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements. Since the Company currently uses an expected losses from customers method, the Company does not anticipate the adoption of ASU 2016-13 will have a material impact on the Company's financial condition or results of operations.
In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new guidance is effective for the Company beginning October 1, 2020.
| 2. | PROPERTY AND EQUIPMENT |
Property and equipment consist of the following at March 31, 2020 and September 30, 2019:
| Estimated Service Lives | March 31, 2020 | September 30, 2019 | ||||||||
| Furniture, fixtures and equipment | 2 - 5 years | $ | 93,762 | $ | 93,073 | |||||
| Internally developed software | 10 years | 152,000 | 152,000 | |||||||
| 245,762 | 245,073 | |||||||||
| Less accumulated depreciation and amortization | (115,696 | ) | (105,082 | ) | ||||||
| $ | 130,066 | $ | 139,991 | |||||||
Depreciation expense was $4,061 and $9,967 during the three months ended March 31, 2020 and March 31, 2019, respectively, and $12,359 and $18,239 during the six months ended March 31, 2020 and March 31, 2019, respectively.
| 3. | INTELLECTUAL PROPERTY |
Intellectual property consists of the following:
| Intellectual property at September 30, 2018 | $ | 48,940 | ||
| Intellectual property purchased at cost | 4,230 | |||
| Intellectual property at September 30, 2019 | 53,170 | |||
| Intellectual property purchased at cost | – | |||
| Intellectual property at March 31, 2020 | $ | 53,170 |
| 4. | LEASES |
The Company has conducted some of its operations from leased premises. At March 31, 2020, the remaining lease term and weighted average discount rate for operating leases was 3.8 years and 10%, respectively. For the three and six months ended March 31, 2020, the Company's cash paid for the operating lease was $32,771, and $64,692, respectively. In April 2020, the Company tendered its main leased premises back to the landlord, and does not contemplate occupying the property in the future, nor will there by a replacement property as the Company successfully operates remotely – see Subsequent Events discussion.
| 12 |
The undiscounted annual future minimum lease payments consist of the following at:
| March 31, 2020 | ||||
| 2020 | $ | 46,272 | ||
| 2021 | 92,544 | |||
| 2022 | 96,016 | |||
| 2023 | 105,898 | |||
| 2024 | 32,584 | |||
| Total lease payments | 373,314 | |||
| Interest | (81,227 | ) | ||
| Present values of lease liabilities | $ | 292,087 | ||
| 5. | LINE OF CREDIT |
The Company has a revolving line of credit with Wells Fargo Bank, N.A. in the amount of $67,500. Amounts drawn under this line of credit are due on demand, and monthly interest and principal payments are required. The interest rate on the line of credit is 9.5%. This line of credit is supported by the personal guarantee of the majority stockholder. Line of credit balance was $60,185 and $63,919 at March 31, 2020 and September 30, 2019, respectively.
| 6. | NOTES PAYABLE |
On April 19, 2019 the Company entered into a Promissory Note Payable with Charles O’Banon (“O’Banon”), a customer, in the amount of $32,205. The note is in settlement of tax penalties and interest he incurred, that were proximately caused by the Company’s actions. The monthly principal and interest payments are $623, with a balloon payment of $14,048 in April 2022. The note is being repaid over 36 months and bears an interest rate of 6%. The outstanding balance on March 31, 2020 and September 30, 2019 was $26,511, and $29,401 respectively.
On April 12, 2019 the Company entered into a loan agreement with John Pollock, Executive Vice President of the Company. The note bears interest at 2.76%, and is due on December 1, 2020. See Related Party Transactions.
The Company’s maturities of debt subsequent to March 31, 2020 are as follows:
| 2020 | $ | 2,977 | ||
| 2021 | 6,229 | |||
| 2022 | 17,305 | |||
| $ | 26,511 |
| 7. | ACCRUED EXPENSES |
Accrued expenses consist of the following at March 31, 2020, and September 30, 2019:
| March 31, 2020 | September 30, 2019 | |||||||
| Accrued payroll | $ | 8,611 | $ | 19,502 | ||||
| Accrued operating expenses | 79,752 | 113,013 | ||||||
| SAR liability | 7,776 | – | ||||||
| Credit card payable | 17,515 | – | ||||||
| Deferred rent | – | 14,357 | ||||||
| $ | 113,654 | $ | 146,872 | |||||
| 13 |
| 8. | INCOME TAXES |
For the three and six months ended March 31, 2020 and 2019, the effective tax rate of 0% varies from the U.S. federal statutory rate primarily due to state income taxes, net losses, certain nondeductible expenses, changes in the federal statutory rate are from 35% to 21%, and an increase in the valuation allowance associated with the net operating loss carryforwards. Our deferred tax assets related to net operating loss carryforwards remain fully reserved due to uncertainty of utilization of those assets.
A deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit in the accompanying consolidated statements of operations are the result of changes in the assets and liabilities for deferred taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount for any tax benefits that, based on available evidence, are not expected to be realized. Income tax expense is the current tax payable or refundable for the year plus or minus the net change in the deferred tax assets and liabilities. Deferred income taxes of the Company arise from the temporary differences between financial statement and income tax recognition of NOL carry-forwards.
The deferred tax assets and liabilities in the accompanying consolidated balance sheets include the following components at March 31, 2020 and September 30, 2019:
| March 31, 2020 | September 30, 2019 | |||||||
| Net non-current deferred tax assets: | ||||||||
| Net operating loss carry-forward | $ | 1,186,130 | $ | 1,098,314 | ||||
| Property and equipment | 28,831 | 3,456 | ||||||
| Total | 1,214,961 | 1,101,770 | ||||||
| Net non-current deferred tax liabilities: | ||||||||
| Intangible assets | 43,608 | 7,996 | ||||||
| Net | 1,171,353 | 1,093,774 | ||||||
| Less valuation allowance | (1,171,353 | ) | (1,093,774 | ) | ||||
| Net deferred taxes | $ | – | $ | – | ||||
| 9. | COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS |
Legal Proceedings
From time to time, we are a party to or are otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. Management believes the legal proceedings that the Company is involved in are immaterial to our ability to operate or market our services, our consolidated financial position, results of operations or cash flows.
| 10. | STOCKHOLDERS’ EQUITY |
Common Stock
The Company is authorized to issue up to 300,000,000 shares of common stock, par value $0.001 per share.
During the six months ended March 31, 2020 and 2019, the Company sold 75,757 shares and 0 shares, respectively, for $25,000 and $0, respectively.
| 11. | STOCK OPTION PLAN |
Effective February 27, 2015, the Company established the 2015 Stock Option Plan (the “Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. The maximum number of shares of stock that may be issued pursuant to the exercise of options under the Plan is 9,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after February 27, 2018.
| 14 |
Effective November 22, 2016, the Company established the 2016 Stock Option Plan (the “2016 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options and stock appreciation rights (SARs). The maximum number of shares of stock that may be issued pursuant to the exercise of options under the 2016 Plan is 20,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after ten years from the date of adoption of the 2016 Plan.
Stock option activity is summarized as follows:
| Shares Under Option | Value of Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |||||||||||
| Outstanding - September 30, 2018 | 3,631,562 | $ | 417,245 | $ | 0.58 | 94 months | ||||||||
| Granted | 2,269,650 | 472,048 | 0.21 | 107 months | ||||||||||
| Exercised | – | – | – | |||||||||||
| Canceled or expired | 3,112,712 | 338,838 | 0.24 | |||||||||||
| Outstanding - September 30, 2019 | 2,788,500 | 550,455 | 0.29 | 96 months | ||||||||||
| Granted | 4,850,000 | 1,461,200 | 0.44 | 117 months | ||||||||||
| Exercised | 12,799 | 139 | 0.06 | 94 months | ||||||||||
| Canceled or expired | 1,113,666 | 904,470 | 0.23 | |||||||||||
| Outstanding - March 31, 2020 | 6,512,035 | $ | 1,107,046 | $ | 0.17 | 91 months | ||||||||
| Exercisable - March 31, 2020 | 1,633,318 | $ | 0.17 | 83 months | ||||||||||
Unamortized share-based compensation expense as of March 31, 2020 amounted to $773,410 which is expected to be recognized over the next 5 years.
Total compensation expense, included in salaries and wages, of previously unamortized stock compensation was $11,030 and $44,091 for the three ended March 31, 2020 and 2019, respectively, and $16,251 and $92,345 for the six months ended March 31, 2020 and 2019, respectively.
On November 27, 2019 the 2016 Plan was amended to allow grants of other equity related rights, including Stock Appreciation Rights. During the three and six months ended March 31, 2020, 4,350,000 options and SARs and 4,850,000 were granted respectively. SARs are recorded as a liability, because there is a cash settlement option.
| 12. | RELATED PARTY TRANSACTIONS |
Company entered into an agreement to purchase 100% of the stock of Forta. The transaction was valued at $9 million. Scott Winters, Gary Nemer (a former board member) and William Nelson, Jr. own, in aggregate, in excess of 80% of the shares of stock of Forta.
As a result of the acquisition of the TMN business in 2016, the Company is obligated to make payments to TaxTuneup, LLC, which is an entity owned by Edward A. Lyon (a current board member), each month totaling $16,500. The total paid under these agreements in the three months ended March 31, 2020 and 2019 respectively, were $49,500 and $49,500, and for the six months ended March 31, 2020 and 2019 were $99,000 and $99,000.
On April 12, 2019 the Company entered into a loan agreement with John Pollock, Executive Vice President of the Company. The note bears interest at 2.76%, and will be repaid in six equal installments of $2,520, beginning July 1, 2019. The balance of the loan at March 31, 2020 was $5,092 and at September 30, 2019 was $7,526.
On February 28, 2020 and March 5, 2020, the Board of Directions approved employment agreements that included employee stock options and stock appreciation rights to employees that are also Board members and related parties totaling 3,450,000 in grants.
| 15 |
| 13. | SUBSEQUENT EVENTS |
On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes provision for a Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). The PPP allows qualifying business to borrow up to $10 million calculated based on qualifying payroll costs. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company has applied for a PPP loan in the amount of $283,345. The loan was funded on May 8, 2020. The Company expects to use the full proceeds of the PPP loan in accordance with the provisions of the CARES Act.
In April 2020, the Company tendered its main leased premises back to the landlord, and does not contemplate occupying the property in the future, nor will there by a replacement property as the Company successfully operates remotely. Management believes that the landlord will be able to re-lease the property, and the remaining exposure to the Company under the lease is not material.
In December 2019, a novel strain of coronavirus, referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to other countries, including the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Further, the President of the United States declared the COVID-19 pandemic a national emergency. States in which we operate declared states of emergency related to the spread of COVID-19 and issued executive orders directing individuals to stay at their place of residence for an indefinite period of time.
The financial markets demonstrated significant volatility in reaction to the virus outbreak. There has been considerable strain on companies in many sectors of the economy. Investors suffered significant decreases in the value of their investment portfolios, and the economy has significantly shut down. It is unclear when the economy will start up again, and the lingering effects are not known. During periods of high volatility and uncertainty many investors choose to stop ongoing investment activity and sit on the sidelines until the markets become more stable.
The Company’s revenues are adversely affected when investors reduce their investment activities. In addition, part of Company’s revenues is based upon the value of assets under management. If the investment portfolios of clients decrease in value, the fees charged for investment advice also decreases.
The Company could be affected by lack of access to its offices, although that seems to have had little short term impact as employees have succeeded in maintaining productivity while working remotely. The long term effects, however, may present significant issues.
Any significant shutdown of the economy for a sustained period will affect the Company’s revenue which could lead to losses.
| 16 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our historical results of operations during the periods presented and our financial condition. This MD&A should be read in conjunction with our financial statements and the accompanying notes and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause our actual results to differ materially from management’s expectations. See the sections entitled “Risk Factors” below.
Plan of Operations
Financial Gravity Companies, Inc. (“Financial Gravity”, “We” or the “Company”), based in Austin, Texas, was formed specifically to be the parent company of several subsidiaries that provide integrated tax, investment, business, and financial solutions. Financial Gravity’s clients include small businesses, small business owners and high and middle net worth individuals. The Company’s services are focused on helping clients make more money and build wealth, most often with tax savings, lowering costs and improving efficiency. In addition to expanding through client procurement and organic growth, Financial Gravity intends to pursue acquisitions. The primary acquisition targets currently include investment marketing and financial advisory and broker dealer firms. In fiscal year 2019, the Company entered into a purchase agreement with Forta, which management believes will be consummated by June 1, 2020, or before. The Company is actively identifying additional potential acquisition candidates to fuel more rapid growth.
Financial Gravity’s Subsidiaries:
The following outline briefly describes Financial Gravity’s active subsidiaries and the products and services they offer:
Sofos Investments, Inc. Sofos is a registered investment advisor (“RIA”), registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses, including financial planning, wealth management and money management.
Tax Master Network, LLC through the Tax Master Network® provides monthly subscriptions services to the TMN systems, coaching and marketing services to over 300 Certified Public Accountants (“CPA”) and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. TMN’s tax planning services include the Tax Blueprint®, Certified Tax Master®, and the Tax Operating System.
MPath Advisor Resources, LLC (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.
Forta Financial Group, Inc. (“Forta”) On September 30, 2019, the Company entered into a merger agreement with Forta, to acquire Forta in exchange for Company stock. The merger is awaiting FINRA approval. When approved, the Forta shareholders will own more than 50% of the Company. Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation.
Organic growth has come in three key areas.
Tax Services and financial advisory services, including Tax Blueprint® and ongoing Tax Operating System® services that are under development.
Brokerage and Wealth Management Services – and brokerage and investment advisory services after the Forta acquisition and money management and investment advisory services through Sofos. Other Products and Services (Insurance and other miscellaneous products and services).
All future growth is expected to come from these key areas, organic growth, acquisitions, and strategic alliances.
| 17 |
Results of Operations for the three and six months ended March 31, 2020 compared to the three and six months ended March 31, 2019
Revenues
For the three months ended March 31, revenues decreased $544,576 to $616,680 from $1,161,256 for the three months ended March 31, 2019. For the six months ended March 31, 2020, revenues decreased $746,766 to $1,308,755 from $2,055,521 for to the six months ended March 31, 2019. The principal components of the decrease in revenue for the six months was the sale Financial Gravity Tax ($117,000), reduction in revenue from the sale of TBPS ($48,500), reduction in the sale of insurance and commission products ($265,880), TMN subscriptions also fell ($169,000), as did referral commissions ($37,570).
Operating Expenses
Cost of services decreased by $859 to $14,646 for the quarter ended March 31, 2020 from $15,505 for the three months ended March 31, 2019, and decreased by $2,653, to $26,657 from $29,310 for the six months ended March 31, 2020 and March 31, 2019, respectively. The decrease is primarily related to decreased credit card processing fees.
Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses increased $43,821 to $70,646 for the three months ended March 31, 2020 from $26,825 for the three months ended March 31, 2019. Professional services increased $186,866 to $186,979 for the six months ended March 31, 2020 from $113 for the six months ended March 31, 2019. The variances are comprised of increases in legal fees of $15,765 for the three months ended March 31, 2020 and $61,620 for the six months ended March 31, 2020, and increases in “Professional Services – Other” of $24,825 for the three months and $102,076 for the six months, respectively, related to implementing new technology offerings.
Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $77,715 to $21,785 for the three months ended March 31, 2020 from $99,500 for the three months ended March 31, 2019. The decrease is principally due to a charge of $69,300 in the three months ended March 31, 2019, to amortization, for the full impairment of Trademarks. Depreciation and amortization decreased $80,793 to $47,807 for the six months ended March 31, 2020, from $128,600 for the six months ended March 31, 2019. The principal difference is the same charge to amortization for full impairment of Trademarks.
General and administrative expenses decreased $38,538 to $85,903 for the three months ended March 31, 2020 from $124,441 for the three months ended March 31, 2019. General and administrative expenses decreased $89,654 to $181,812 for the six months ended March 31, 2020 from $271,466 for the six months ended March 31, 2019. The decreases in costs are across the board.
Marketing expenses decreased $16,499 to $13,472 for the three months ended March 31, 2020 from $29,971 for the three months ended March 31, 2019. Marketing expenses decreased $26,988 to $34,585 for the six months ended March 31, 2020 from $61,573 for the six months ended March 31, 2019. The decrease is due to the Company shutting down some previous marketing channels, while new channels have yet to be fully identified and implemented.
Salaries and wages expenses decreased $558,861 to $ 570,209 for the three months ended March 31, 2020 from $1,129,070 for the three months ended March 31, 2019, and decreased $841,426 to $ 1,149,020 for the six months ended March 31, 2020 from $1,990,446 for the six months ended March 31, 2019. The decrease was principally due to decreases in Commissions, $244,700, and Stock based compensation, $136,814 for the three months ended March 31, 2020. The decrease was principally due to decreases in Commissions of $340,829, stock based compensation of $177,983 for the six months ended March 31, 2020.
The Company experienced a decrease in its net loss of $153,916 to a net loss of $162,107 for the three months ended March 31, 2020 from a net loss of $316,023 for the three months ended March 31, 2019. The Company experienced a decrease in its net loss of $348,919 to a net loss of $171,352 for the six months ended March 31, 2020 from a net loss of $520,271 for the six months ended March 31, 2019. The decreases are primarily attributable to the reasons noted above, and the proceeds from the sale of the FG Tax unit for $150,000.
| 18 |
Significant Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of Financial Gravity’s consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements.
Use of Estimates and Assumptions.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition and Accounts Receivable.
Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments.
Services income is recognized as consulting and other professional services are performed by the Company.
Commission revenue is derived from the sale of premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy is issued.
Revenue represents gross billings less discounts, net of sales tax, as applicable. Amounts invoiced for work not yet completed are shown as Contract liabilities in the accompanying consolidated balance sheets.
Tax Master Network has 5 levels of subscription services that are charged and collected on a month to month basis (Tax Master basic, advance, and elite membership, all-stars coaching, and networker). None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships.
Accounts receivable are primarily generated from the TMN subscriptions (collected in advance), the sale of investment products and services (collected directly from the custodian or issuer), and of products related to tax planning (collected in advance). The accounts are carried at the invoiced amount less estimate made for doubtful accounts based on management’s review of outstanding balances. The collectability of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and review of specific accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted and when management determines the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when received.
In the normal course of business, the Company may extend credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
Stock-Based Compensation
The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rates of 1.56% in the quarter ending March 31, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 7 years and volatility of 100% in 2020 and 35% to 40% in 2019.
Liquidity and Capital Resources
As of March 31, 2020, the Company had cash and cash equivalents of $22,579. The decrease of ($13,474) in cash and cash equivalents during the six months ended March 31, 2020 was primarily due to net cash used in operating activities and the sale of Financial Gravity Tax, Inc.
| 19 |
Net cash used in operating activities was $29,415 for the six months ended March 31, 2020. The net cash used in operating activities was due to net loss of $171,352 adjusted primarily by the following: (1) depreciation and amortization of $47,807, stock based compensation of $16,251, and an increase in Accounts payable – trade and related party payables of $125,286.
Net cash provided by financing activities was $18,375 for the six months ended March 31, 2020. This was principally due to payments on the line of credit ($6,996) and notes payable ($2,890), offset by the sale of common stock ($25,000) option and SAR grant activity.
As shown below, at March 31, 2020, our contractual cash obligations totaled approximately $460,010, 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 | Total | ||||||||||||
| Notes payable | $ | 6,045 | $ | 20,466 | – | $ | 26,511 | |||||||||
| Lease liability | 92,544 | 199,310 | 81,460 | 373,314 | ||||||||||||
| Line of Credit | 60,185 | – | – | 60,185 | ||||||||||||
| Total contractual cash obligations | $ | 158,774 | $ | 219,776 | $ | 81,460 | $ | 460,010 | ||||||||
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need additional financing to fund additional material capital expenditures and to fully implement its business plan. There are no assurances that additional financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead expenditures as a way to supplement the cash flows generated by operations. The Company has a backlog of fees under contract in addition to the Company’s accounts receivable balance. The failure to adequately fund its capital requirements could have a material adverse effect on our business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s stockholders and incurring additional indebtedness could involve the imposition of covenants that restrict our operations. Management is trying to raise additional capital through sales of common stock as well as seeking financing from third parties, via both debt and equity, to balance the Company’s cash requirements and to finance specific capital projects.
Off Balance Sheet Transactions and Related Matters
Other than operating leases discussed in Note 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our business is leveraged and, accordingly, is sensitive to fluctuations in interest rates. Any significant increase in interest rates could have a material adverse effect on our financial condition and ability to continue as a going concern.
Stock Market Risk. Our investment advisory business is subject to stock market risks. Revenue is generally based upon a percentage of the value of assets under management. Stock market downturns can affect the value of assets under management and therefore affect revenue.
| 20 |
Item 4. Controls and Procedures
As of the end of the period covered by this report, our principal executive officer and principal financial officer, evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, we concluded that, as of the date of the evaluation, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding required disclosures. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 21 |
Item 1A. RISK FACTORS.
No changes from September 30, 2019 10-K annual report other than:
In December 2019, a novel strain of coronavirus, referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to other countries, including the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Further, the President of the United States declared the COVID-19 pandemic a national emergency. States in which we operate declared states of emergency related to the spread of COVID-19 and issued executive orders directing individuals to stay at their place of residence for an indefinite period of time.
The financial markets demonstrated significant volatility in reaction to the virus outbreak. There has been considerable strain on companies in many sectors of the economy. Investors suffered significant decreases in the value of their investment portfolios, and the economy has significantly shut down. It is unclear when the economy will start up again, and the lingering effects are not known. During periods of high volatility and uncertainty many investors choose to stop ongoing investment activity and sit on the sidelines until the markets become more stable.
The Company’s revenues are adversely affected when investors reduce their investment activities. In addition, part of Company’s revenues is based upon the value of assets under management. If the investment portfolios of clients decrease in value, the fees charged for investment advice also decreases.
The Company could be affected by lack of access to its offices, although that seems to have had little short term impact as employees have succeeded in maintaining productivity while working remotely. The long term effects, however, may present significant issues.
Any significant shutdown of the economy for a sustained period will affect the Company’s revenue which could lead to losses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
None
| 31.1 | Rule 13a-14(a) Certification of the Principal Executive Officer. |
| 31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer. |
| 32 | Section 1350 Certifications. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
| 24 |
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: May 28, 2020 | By: /s/ Scott Winters |
| Scott Winters | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: May 28, 2020 | By: /s/ Paul Williams |
| Paul Williams | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Capacity | Date | |
| /s/ Scott Winters | CEO, Chairman of the Board | May 28, 2020 | |
| Scott Winters | (principal executive officer) | ||
| /s/ Paul Williams | Vice Chairman, CFO | May 28, 2020 | |
| Paul Williams | (principal financial officer) | ||
| /s/ Edward A. Lyon | Director | May 28, 2020 | |
| Edward A. Lyon | |||
| /s/ John Pollock | Director | May 28, 2020 | |
| John Pollock | |||
| /s/ Jennifer Winters | Director | May 28, 2020 | |
| Jennifer Winters | |||
| /s/ William Nelson | Director | May 28, 2020 | |
| William Nelson, Jr. | |||
| 25 |