Financial Gravity Companies, Inc. - Quarter Report: 2018 March (Form 10-Q)
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, 2018
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.) |
800 N. Watters Rd., Suite 120, Allen, Texas 75013
(Address of Principal Executive Offices)
469-342-9100
(Issuer Telephone number)
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 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. (Check one)
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]
The number of shares outstanding of the registrant’s Common Stock as of April 1, 2018 was 35,837,900.
FINANCIAL GRAVITY COMPANIES, INC.
FORM 10-Q
2 |
PART I - FINANCIAL INFORMATION
Financial Gravity Companies, Inc. and Subsidiaries
March 31, 2018 (Unaudited) | September 30, 2017
| |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 219,348 | $ | 444,420 | ||||
Receivables, net | 86,875 | 109,795 | ||||||
Accounts receivable - related party | 2,303 | 4,506 | ||||||
Prepaid expenses and other current assets | 101,369 | 64,603 | ||||||
Total current assets | 409,895 | 623,324 | ||||||
OTHER ASSETS | ||||||||
Property and equipment, net | 157,123 | 127,503 | ||||||
Customer relationships, net | 16,838 | 22,450 | ||||||
Proprietary content, net | 361,007 | 393,824 | ||||||
Trade name | 69,300 | 69,300 | ||||||
Non-compete agreements, net | 13,150 | 15,780 | ||||||
Trademarks | 38,233 | 30,085 | ||||||
Goodwill | 1,094,702 | 1,094,702 | ||||||
Total other assets | 1,750,353 | 1,753,644 | ||||||
TOTAL ASSETS | $ | 2,160,248 | $ | 2,376,968 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable - trade | $ | 120,658 | $ | 51,814 | ||||
Accrued expenses | 66,922 | 122,552 | ||||||
Deferred revenue | – | 95,601 | ||||||
Notes payable | 223,750 | 165,562 | ||||||
Total current liabilities | 411,330 | 435,529 | ||||||
NOTES PAYABLE | 839,199 | 281,031 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock - 300,000,000 shares authorized; $0.001 par value; 35,837,900 shares issued and outstanding as of March 31, 2018 and 35,737,900 shares issued and outstanding as of September 30, 2017. | 35,838 | 35,738 | ||||||
Additional paid-in capital | 5,874,332 | 5,679,668 | ||||||
Accumulated deficit | (5,000,450 | ) | (4,054,998 | ) | ||||
Total stockholders’ equity | 909,720 | 1,660,408 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,160,248 | $ | 2,376,968 |
The accompanying notes are in integral part of these consolidated financial statements.
3 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
REVENUE | ||||||||||||||||
Investment management fees | $ | 484,672 | $ | 391,123 | $ | 864,909 | $ | 635,502 | ||||||||
Service income | 600,398 | 543,199 | 1,140,060 | 1,061,160 | ||||||||||||
Commissions | – | 31,875 | – | 41,031 | ||||||||||||
Rental income | – | 1,500 | – | 3,000 | ||||||||||||
Total revenue | 1,085,070 | 967,697 | 2,004,969 | 1,740,693 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Cost of services | 4,079 | 20,707 | 13,211 | 40,964 | ||||||||||||
Professional services | 182,582 | 359,557 | 358,637 | 629,651 | ||||||||||||
Depreciation and amortization | 28,295 | 24,767 | 54,124 | 49,444 | ||||||||||||
General and administrative | 731,096 | 154,982 | 972,005 | 276,808 | ||||||||||||
Management fees - related party | 63,500 | 50,000 | 113,500 | 103,000 | ||||||||||||
Marketing | 82,307 | 74,591 | 142,845 | 176,469 | ||||||||||||
Salaries and wages | 635,178 | 403,710 | 1,234,736 | 781,429 | ||||||||||||
Total operating expenses | 1,727,035 | 1,088,314 | 2,889,057 | 2,057,765 | ||||||||||||
Net operating loss | (641,965 | ) | (120,617 | ) | (884,087 | ) | (317,072 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Other (expense) income | (29,258 | ) | – | (29,258 | ) | 191 | ||||||||||
Interest expense | (10,808 | ) | (16,328 | ) | (32,107 | ) | (28,331 | ) | ||||||||
Total other (expense) income | (40,066 | ) | (16,328 | ) | (61,365 | ) | (28,140 | ) | ||||||||
NET LOSS | $ | (682,030 | ) | $ | (136,945 | ) | $ | (945,452 | ) | $ | (345,212 | ) | ||||
LOSS PER SHARE - Basic and Diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) |
The accompanying notes are in integral part of these consolidated financial statements.
4 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, (Unaudited) | ||||||||
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (945,452 | ) | $ | (345,212 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | 54,124 | 49,444 | ||||||
Stock based compensation | 94,764 | – | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivables, net | 22,920 | (166,902 | ) | |||||
Accounts receivable - related party | 2,303 | – | ||||||
Prepaid expenses | (36,766 | ) | (24,742 | ) | ||||
Accounts payable - trade | 68,744 | 22,727 | ||||||
Accrued expenses | (55,630 | ) | (3,609 | ) | ||||
Deferred revenue | (95,601 | ) | 47,249 | |||||
Net cash used in operating activities | (890,594 | ) | (421,045 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Cash paid for purchase of property and equipment | (42,687 | ) | (2,161 | ) | ||||
Purchases of trademarks | (8,148 | ) | (50 | ) | ||||
Net cash used in investing activities | (50,835 | ) | (2,211 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from notes payable | 740,000 | 100,000 | ||||||
Payments on notes payable | (123,644 | ) | (33,667 | ) | ||||
Payments on line of credit | – | (1,112 | ) | |||||
Proceeds from the sale of common stock | 100,000 | 625,000 | ||||||
Net cash provided by financing activities | 716,356 | 690,221 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (225,072 | ) | 266,965 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 444,420 | 132,803 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 219,348 | $ | 399,768 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 32,107 | $ | 26,267 | ||||
Taxes | $ | – | $ | – | ||||
Non-cash activities: | ||||||||
Settlement of payables owed by legacy Pacific Oil Company Stockholders | $ | – | $ | 61,365 |
The accompanying notes are in integral part of these consolidated financial statements.
5 |
Financial Gravity Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Financial Gravity Companies, Inc. and Subsidiaries (the “Company”) located in Allen, Texas and provides integrated tax, business, and financial solutions to small businesses, small business owners and high net worth individuals. The Company’s focus is on helping clients build wealth, most often with tax savings, lowering costs and improving efficiency. The wholly-owned subsidiaries of the Company include: Financial Gravity Holdings, Inc., Financial Gravity Operations, Inc., Financial Gravity Tax, Inc., Financial Gravity Wealth, Inc., Financial Gravity Business, LLC, Financial Gravity Ventures, LLC., SASH Corporation (doing business as Metro Data Processing) and Tax Coach Software, LLC.
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.
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
Receivables include trade accounts receivable and 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 $14,842 as of March 31, 2018 and September 30, 2017.
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.
6 |
Property and equipment operated under material leases which transfer substantially all benefits and risks associated with the assets to the Company are capitalized. An asset and liability equal to the present or fair value, if appropriate, of minimum payments over the term of the leases are recorded. Amortization of the asset is computed using the straight-line method. Expenses associated with all other leases (operating leases) are charged to income as incurred.
Customer Relationships
The customer relationships acquired as part of the TCS purchase have been recognized in the accompanying consolidated balance sheets at $44,900, the value attributed to such relationships on the date of the purchase. The customer relationships are being amortized on a straight-line basis over a four-year estimated life. During each of the three and six months ended March 31, 2018 and 2017, the Company recorded amortization expense of $2,806 and $5,612, 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, 2018 was $28,062 and $22,450 at September 30,2017.
Proprietary Content
The proprietary content acquired as a part of the TCS purchase has been recognized in the accompanying consolidated balance sheets at $525,100, the value attributed to such content on the date of the purchase. The proprietary content is being amortized on a straight-line basis over an eight-year estimated life. During each of the three and six months ended March 31, 2018 and 2017, the Company recorded amortization expense of $16,410 and $32,820 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at March 31, 2018 was $164,093 and $131,276 at September 30, 2017.
Trade Name
The trade name acquired as a part of the TCS purchase has been recognized in the accompanying consolidated balance sheets at $69,300, the value attributed to such name on the date of the purchase. 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 sheets to be impaired as of March 31, 2018 and September 30, 2017.
Non-compete Agreements
Non-compete agreements entered into as a part of the TCS purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed to such agreements on the date of the purchase. 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, 2018 and 2017, the Company recorded amortization expense of $1,315 and $2,630, 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, 2018 was $13,150 and $10,520 at September 30, 2017.
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 March 31, 2018 and September 30, 2017.
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 sheets to be impaired as of March 31, 2018 and September 30, 2017.
7 |
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 was 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 and cash flows include the results of operations of the acquired subsidiaries from the date of acquisition.
Income Taxes
The Company accounts for federal and state income taxes pursuant to GAAP, which requires an asset and liability approach for financial accounting and reporting for income taxes based on tax effects of differences between the financial statement and tax basis of assets and liabilities.
The Company accounts for all uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 – Income Taxes (“ASC 740”). ASC 740 provides guidance on de-recognition, classification, interest and penalties and disclosure related to uncertain income tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no accrued interest or penalties as of March 31, 2018 and September 30, 2017.
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.
Loss Per Share
Basic loss per common share is computed by dividing net losses available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Average number of common shares were 35,837,900 and 34,886,089 for the three months ended March 31, 2018 and 2017, respectively. Average number of common shares were 35,823,648 and 35,137,625 for the six months ended March 31, 2018 and 2017, respectively. For the periods ended March 31, 2018 and 2017 3,430,646 and 2,512,346 common stock options and warrants were excluded from diluted loss per share as they were antidilutive.
Revenue Recognition
FG Wealth generates investment management fees for services provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage client investments.
FG Tax and MDP generate service income from consulting and other professional services performed.
Commission revenue is derived from the sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy is issued.
Revenue represents gross billings less discounts, and is calculated net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets.
8 |
Tax Coach Software has 3 types of services that are charged and collected on a month to month subscription basis (Tax Coach basic membership, All-Stars coaching, and Wire Service weekly broadcast email). None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships.
Advertising
Advertising costs are charged to operations when incurred. Advertising and marketing expense for the three months ended March 31, 2018 and 2017 was $82,307 and $74,591, respectively; and $142,845 and $176,469 for the six months ended March 31, 2018 and 2017.
Stock-Based Compensation
The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rates of 0.85% to 1.41% in 2018 and 0.97% in 2017, 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.
Adjustments
All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected in the financial statements.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand.
The Company is actively seeking growth of its service offerings, both organically and via new client relationships. Management, in the ordinary course of business, is trying to raise additional capital through sales of common stock as well as seeking financing via equity or debt, or both from third parties. There are no assurances that additional financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead expenditures. The failure to adequately fund its capital requirements could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s stockholders and incurring additional indebtedness could involve an increased debt service cash obligation, the imposition of covenants that restrict the Company’s operations or the Company’s ability to perform on its current debt service requirements. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Future Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323). ASU 2017-03 amends the Codification for SEC staff announcements made at two Emerging Issues Task Force (EITF) meetings. At the September 2016 meeting, the SEC staff expressed its expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance (including any amendments issued prior to adoption) on revenue (ASU 2014-09), leases (ASU 2016-02) and credit losses on financial instruments (ASU 2016-13) in accordance with SAB Topic 11.M. That Topic requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. ASU 2017-03 incorporates these SEC staff views into ASC 250 and adds references to that guidance in the transition paragraphs of each of the three new standards. The ASU also conforms ASC 323-740-S99-2, which describes the SEC staff’s views on accounting for investments in qualified affordable housing projects, to the guidance issued in ASU 2014-01. The staff announced the change at the November 2016 EITF meeting.
9 |
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, part of the FASB’s simplification initiative. ASU 2015-17 requires companies to classify deferred tax liabilities and assets as noncurrent. ASU 2015-17 is effective for fiscal years beginning after December 15, 2018. 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 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. 2016-08, 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.
2. | PROPERTY AND EQUIPMENT |
Property and equipment consist of the following at March 31, 2018 and September 30, 2017:
Estimated Service Lives | March 31, 2018 | September 30, 2017 | ||||||||
Furniture, fixtures and equipment | 2 - 5 years | $ | 36,485 | $ | 11,039 | |||||
Internally developed software | 10 years | 169,234 | 152,000 | |||||||
205,720 | 163,039 | |||||||||
Less accumulated depreciation and amortization | 48,597 | 35,536 | ||||||||
$ | 157,123 | $ | 127,503 |
Total Depreciation expense for the three months ended March 31, 2018 and 2017 was $7,764 and $3,800, respectively; and $13,062 and $7,600 for the six months ended March 31, 2018 and 2017, respectively.
3. | TRADEMARKS |
Trademarks consist of the following:
Trademarks at September 30, 2016 | $ | 22,592 | ||
Trademarks purchased at cost | 7,493 | |||
Trademarks at September 30, 2017 | 30,085 | |||
Trademarks purchased at cost | 8,148 | |||
Trademarks at March 31, 2018 | $ | 38,233 |
10 |
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. No amounts were outstanding under the line of credit at March 31, 2018 or September 30, 2017.
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, 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 $0 and $92,197 at March 31, 2018 and September 30, 2017, 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 $0 and $7,935 at March 31, 2018 and September 30, 2017, 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% with payments of $5,000 due monthly. The note matures on August 16, 2018. Fourly is owned by the majority stockholder of the Company. The outstanding balance was $22,949 and $46,461 at March 31, 2018 and September 30, 2017, respectively.
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%. First year payment is equal to 10% of the loan value with monthly principal and interest of $4,614 starting on year two. The remaining principal and accrued interest of this note is due on the maturity date, July 31, 2020. The outstanding balance was $100,000 at March 31, 2018 and 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%. First year payment is equal to 10% of the loan value with monthly principal and interest of $4,614 starting on year two. The remaining principal and accrued interest of this note is due on the maturity date, August 15, 2020. The outstanding balance was $100,000 at March 31, 2018 and 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%. First year payment is equal to 10% of the loan value with monthly principal and interest of $4,614 starting on year two. The remaining principal and accrued interest of this note is due on the maturity date, August 15, 2020. The outstanding balance was $100,000 at March 31, 2018 and September 30, 2017.
On October 2, 2017 the Company entered into a Promissory Note Payable with Indar and Sybil Bally in the amount of $100,000. The interest rate on the note is 10%. First year payment is equal to 10% of the loan value with monthly principal and interest of $4,614 starting on year two. The remaining principal and accrued interest of this note is due on the maturity date, October 2, 2020. The outstanding balance was $100,000 and $0 at March 31, 2018 and September 30, 2017.
On October 2, 2017 the Company entered into a Promissory Note Payable with Paul Frueh in the amount of $100,000. The interest rate on the note is 10%. First year payment is equal to 10% of the loan value with monthly principal and interest of $4,614 starting on year two. The remaining principal and accrued interest of this note is due on the maturity date, October 20, 2020. The outstanding balance was $100,000 and $0 at March 31, 2018 and September 30, 2017.
On November 2, 2017 the Company entered into a Promissory Note Payable with Michael and Donna Dade in the amount of $340,000. The interest rate on the note is 10%. First year payment is equal to 10% of the loan value with monthly principal and interest of $15,689 starting on year two. The remaining principal and accrued interest of this note is due on the maturity date, October 20, 2020. The outstanding balance was $340,000 and $0 at March 31, 2018 and September 30, 2017.
On March 15, 2018 the Company entered into a Promissory Note Payable with Helen Janssen in the amount of $200,000. The interest rate on the note is 10%. First year payment is equal to 10% of the loan value with monthly principal and interest of $9,229 starting on year two. The remaining principal and accrued interest of this note is due on the maturity date, February 15, 2021. The outstanding balance was $200,000 and $0 at March 31, 2018 and September 30, 2017.
11 |
The Company’s maturities of debt subsequent to March 31, 2018 are as follows:
2019 | $ | 223,750 | ||
2020 | 515,155 | |||
2021 | 324,044 | |||
$ | 1,062,949 |
6. | ACCRUED EXPENSES |
Accrued expenses consist of the following at March 31, 2018 and September 30, 2017:
March 31, 2018 | September 30, 2017 | |||||||
Accrued payroll | $ | 24,983 | $ | 19,165 | ||||
Accrued operating expenses | 41,939 | 103,387 | ||||||
$ | 66,922 | $ | 122,552 |
7. | INCOME TAXES |
For the three months and six-month periods ended March 31, 2018 and 2017, 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, 2018 and September 30, 2017:
March 31, 2018 | September 30, 2017 | |||||||
Net non-current deferred tax assets: | ||||||||
Net operating loss carry-forward | $ | 745,021 | $ | 1,131,643 | ||||
Property and equipment | 7,350 | 10,719 | ||||||
Total | 752,371 | 1,142,362 | ||||||
Net non-current deferred tax liabilities: | ||||||||
Intangible assets | 580 | 728 | ||||||
Net | 751,791 | 1,141,634 | ||||||
Less valuation allowance | (751,791 | ) | (1,141,634 | ) | ||||
Net deferred taxes | $ | – | $ | – |
8. | COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS |
Leases
The Company conducts operations from leased premises. Some of these leases provide for payment of taxes, insurance, utilities and maintenance. The Company also leases certain equipment under operating leases. Total rent expense for the three months ended March 31, 2018 and 2017 was $31,483 and $22,887, respectively; and $62,966 and $45,088 for the six months ended March 31, 2018 and 2017, 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.
12 |
Future minimum rental obligations as of March 31, 2018 are as follows:
2018 | $ | 50,400 | ||
$ | 50,400 |
Contingencies
Effective October 1, 2015, the Company completed the acquisition of Tax Coach Software, LLC, an Ohio limited liability company ("Tax Coach Software"). The purchase was made by Financial Gravity Holdings, Inc. Under the terms of the acquisition, the Company acquired 100% of Tax Coach Software's membership interests, for shares of common stock of the Company. The total number of shares of common stock issued to the owners of Tax Coach Software was 6,000,000 shares (as amended), at par value of $0.00001 per share, in exchange for 100% of the membership interests of Tax Coach Software. Certificates representing the shares of common stock which served as the purchase price, were required to be deposited in escrow as of the effective date of the acquisition. As part of the purchase agreement documentation, the Sellers maintained the right to unwind the transaction under certain conditions as described in the purchase agreement. The Sellers also retained all rights as shareholders while shares were held in escrow, including the right to vote.
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.
At September 30, 2016, Pacific Oil Company had outstanding payables that the previous owners were in the process of liquidating. The Company recorded $99,056 in pre-merger payables at September 30, 2016. The liabilities have been recorded on the Company’s financial statements 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. During the quarter ended March 31, 2017, $61,365 had been settled. The remaining payable was settled during the fiscal year ended September 30, 2017.
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. 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. | 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 three months ended March 31, 2018 and 2017, the Company sold 0 shares and 275,000 shares, respectively, for $0 and $275,000, respectively.
During the six months ended March 31, 2018 and 2017, the Company sold 100,000 shares and 625,000 shares, respectively, for $100,000 and $625,000, respectively.
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. There were no preferred shares issued or outstanding as of March 31, 2018 and September 30, 2017 for Financial Gravity Holdings.
13 |
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 l-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.
In the quarter ended December 31, 2017, an aggregate of 100,000 shares of the Company’s common stock had been sold for $100,000 for which the Company issued warrants for the purchase of 25,000 shares of common stock of the Company at an exercise price of $1.25 per share for a 1-year term and an additional 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 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.
10. | 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, 2017.
Effective November 22, 2016, the Company established the 2016 Stock Option Plan (the “2016 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. The maximum number of shares of stock that may be issued pursuant to the exercise of options under the 2016 Plan is 20,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after ten years from the date of adoption of the 2016 Plan.
14 |
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, 2016 | 2,200,346 | $ | 22,129 | $ | 0.64 | 106 months | ||||||||
Granted | 661,400 | 323,927 | 0.78 | 113 months | ||||||||||
Exercised | – | – | – | – | ||||||||||
Canceled or expired | 44,600 | 28,495 | 1.00 | – | ||||||||||
Outstanding - September 30, 2017 | 2,817,146 | 317,561 | 0.67 | 98 months | ||||||||||
Granted | 263,500 | 70,727 | 0.53 | 115 months | ||||||||||
Exercised | – | – | – | |||||||||||
Canceled or expired | – | – | – | |||||||||||
Outstanding – March 31, 2018 | 3,080,646 | $ | 388,288 | $ | 0.66 | 97 months | ||||||||
Exercisable – March 31, 2018 | 2,406,029 | – | $ | 0.66 | 92 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 45,000 options that vested at issuance. Total compensation expense, included in salaries and wages, of previously unamortized stock compensation was $54,184 and $0 for the three months ended March 31, 2018 and 2017, and $94,764 and $0 for the six months ended March 31, 2018 and 2017, respectively. Unamortized share-based compensation expense as of March 31, 2018 amounted to $224,997 which is expected to recognize over the next 1.75 years.
11. | RELATED PARTY TRANSACTIONS |
Accounts receivable due from the majority stockholder of the entity, included in accounts receivable – related party in the accompanying consolidated balance sheets was $2,303 and $4,506 as of March 31, 2018 and September 30, 2017, respectively.
Management fees paid to the majority stockholder of the entity, included as management fees - related party in the accompanying consolidated statements of operations were $63,500 and $50,000 for three months ended March 31, 2018 and 2017, respectively $113,500 and $103,000 for the six months ended March 31, 2018 and 2017.
A board member who is also a stockholder provided services to the Company. Expenses for these services totaled $0 and $15,000 for the three months ended March 31, 2018 and 2017, and $0 and $30,000 respectively, for the six months ended March 31, 2018 and 2017 and were included as general and administrative expenses in the accompanying consolidated statements of operations.
Included in professional fees were consulting fees paid to a related party as a condition to the TCS acquisition. Two agreements require certain services at a fixed fee of $16,500 per month, per agreement, commencing on November 1, 2015 with a 90-day termination clause. One agreement requires certain services at a fixed fee of $3,500 per month, commencing on November 1, 2015 with a 90-day termination clause. $109,500 and $109,500 in professional fees were paid under these 3 agreements for the three months ended March 31, 2018 and March 31, 2017, and $211,460 and $225,600 six months ended March 31, 2018 and March 31, 2017 respectively and were included as professional services in the accompanying consolidated statements of operations.
15 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our historical results of operations during the periods presented and our financial condition. This MD&A should be read in conjunction with our financial statements and the accompanying notes and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause our actual results to differ materially from management’s expectations. See the sections entitled “Risk Factors” below.
Plan of Operations
Financial Gravity Companies, Inc. (“Financial Gravity”, “We” or the “Company”), based in Allen, Texas, was formed specifically to be the parent company of several subsidiaries that provide integrated tax, business, and financial solutions. Financial Gravity’s clients include small businesses, small business owners and high net worth individuals. The Company’s services are focused on helping clients make more money and build wealth, most often with tax savings, lowering costs and improving efficiency. In addition to expanding through client procurement and organic growth, Financial Gravity intends to make several 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 is handled by Financial Gravity Companies, Inc.
Financial Gravity Tax, Inc.
Financial Gravity has developed a precise procedure that has proven to be very successful in delivering lower taxes, higher profit, and greater wealth for small business owners.
The process begins with an extensive and comprehensive review of the client’s needs. This assessment sets the requirements for the program that is subsequently developed. Next, Financial Gravity designs a unique "Tax Blueprint®" which identifies several strategies for lowering the client's taxes.
The second step is to use the client’s custom Tax Blueprint® to build that business entity and documentation that captures the identified savings. This is called the Tax Operating System® (TOS). This process is repeated as required and tuned for optimal efficiency thus ensuring that the client receives the best service and optimal solutions in the phases of the business cycle during the year. Clients continue to pay a monthly or weekly subscription fee as part of their TOS service for ongoing tax planning, tax return preparation, payroll and bookkeeping services.
This business unit promises clients they’ll pay the lowest legal, moral and ethical taxes possible. Tax savings is the “tip of the spear” in all 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 guarantees 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 4-8 times multiple to a typical accounting or bookkeeping practice.
16 |
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, Inc.
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. A 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. A 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 has 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 a RIA makes the Company very attractive to the most profitable clients.
Financial Gravity Business, LLC.
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, LLC.
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.
Tax Coach Software, LLC.
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.
17 |
Sash Corporation (dba Metro Data Processing)
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/service marks 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 three and six months ended March 31, 2018 compared to the three and six months ended March 31, 2017
Revenues
For the three months ended March 31, 2018, revenue increased $117,373 to $1,085,070 from $967,697 for the three months ended March 31, 2017. For the six months ended March 31, 2018, revenue increased $264,276 to $2,004,969 from $1,740,693 for the six months ended March 31, 2017. The increase in revenue is due in part to the restructure of services offered.
Operating Expenses
Cost of services activity decreased $16,628 to $4,079 for the three months ended March 31, 2018 from $20,707 for the three months ended March 31, 2017. The decrease is primarily related to a decrease in trimming all unnecessary expenses and cost of services activity decreased $27,753 to $13,211 for the six months ended March 31, 2018 from $40,964 for the six months ended March 31, 2017. The decrease is primarily related to a decrease in trimming all unnecessary expenses.
Professional services expenses decreased $176,975 to $182,582 for the three months ended March 31, 2018 from $359,557 for the three months ended March 31, 2017. Professional services expenses decreased $271,014 to $358,637 for the six months ended March 31, 2018 from $629,651 for the six months ended March 31, 2017. This decrease is primarily due to changes of outside representation.
Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses increased $3,528 to $28,295 for the three months ended March 31, 2018 from $24,767 for the three months ended March 31, 2017. Depreciation and amortization expenses increased $4,680 to $54,124 for the six months ended March 31, 2018 from $49,444 for the six months ended March 31, 2017. The increase is primarily due to assets purchased during the quarter ended March 31, 2018.
General and administrative expenses increased $576,114 to $731,096 for the three months ended March 31, 2018 from $154,982 for the three months ended March 31, 2017. General and administrative expenses increased $695,197 to $972,005 from $276,808 for the six months ended March 31, 2018 and 2017. The increase is primarily due to an increase in costs associated with independent agent’s commissions and consulting cost.
Management fees – expenses increased $13,500 to $63,500 for the three months ended March 31, 2018 from $50,000 for the three months ended March 31, 2017 and increased $10,500 to $113,500 for the six months ended March 31, 2018 from $103,000 for the six months ended March 31, 2017. This increase is due to changes in the contract with Fourly, LLC.
18 |
Marketing expenses increased $7,716 to $82,307 for the three months ended March 31, 2018 from $74,591 for the three months ended March 31, 2018 and decreased $33,624 to $142,845 for the six months ended March 31, 2018 from $176,469 for the six months ended March 31, 2017. This overall decrease is from eliminating and consolidating marketing tools.
Salaries and wages expenses increased $231,468 to $635,178 for the three months ended March 31, 2018 from $403,710 for the three months ended March 31, 2017 and increase $453,307 to $1,234,736 for the six months ended March 31, 2018 from $781,429 for the six months ended March 31, 2017. Salaries and wages increase is due to larger employee commissions being paid out, restructuring of staff members (hiring and separating of employees), and hiring of temporary staff to assist with special projects.
The Company experienced a decrease in its bottom line of $545,085 to a net loss of $682,030 for the three months ended March 31, 2018 from a net loss of $136,945 for the three months ended March 31, 2017, and for the six months ended March 31, 2018 an increase in loss of $600,240 to $945,452 from a net loss of $345,212 for the six months ended March 31, 2017, these losses are primarily attributable to the reasons noted above.
Significant Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of Financial Gravity’s consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements.
Use of Estimates and Assumptions.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition and Accounts Receivable.
Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments.
Services income is recognized as consulting and other professional services are performed by the Company.
Commission revenue is derived from the sale of premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy is issued.
Revenue represents gross billings less discounts, net of sales tax, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets.
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.
In the normal course of business, the Company extends credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
Stock-Based Compensation.
The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rates of 0.85% to 1.41% in 2018 and 0.97% in 2017, dividend yield of 0%, expected life of 2 years and volatility of 43% to 137%.
19 |
Liquidity and Capital Resources
As of March 31, 2018, the Company had cash and cash equivalents of $219,348. The decrease of $225,072 in cash and cash equivalents from September 30, 2017 was due to net cash used in operating activities of $890,594 and net cash used in investing activities of $50,835, offset by net cash provided by financing activities of $716,356.
Net cash used in operating activities was $890,594 for the six months ended March 31, 2018, compared to $421,045 net cash used in operating activities for the six months ended March 31, 2017. The net cash used in operating activities for the six months ended March 31, 2018 was due to net loss of $945,452 adjusted primarily by the following: (1) depreciation and amortization of $54,124, Stock based compensation $94,764, trade accounts receivable of $22,920, accounts receivable – related party of $2,303, and accounts payable – trade of $68,744, (2) offset by decreases in prepaid expense of $36,766, accrued expenses of $55,630 and deferred revenue of $95,601.
Net cash provided by financing activities was $716,356 for the six months ended March 31, 2018, compared to net cash provided by financing activities of $690,221 for the six months ended March 31, 2017. Financing activities for the six months ended March 31, 2018 consisted primarily of $740,000 in borrowings and $100,000 of proceeds from the sale of common stock; offset with payments made to reduce the Company’s debt obligations in the amount of $123,644.
As shown below, at March 31, 2018, our contractual cash obligations totaled approximately $1,113,349, 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 | $ | 223,750 | $ | 839,199 | $ | – | $ | – | $ | 1,062,949 | ||||||||||
Operating leases | 50,400 | 0 | – | – | 50,400 | |||||||||||||||
Total contractual cash obligations | $ | 274,150 | $ | 839,199 | $ | – | $ | – | $ | 1,113,349 |
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 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.
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 |
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.
Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations. Financial Gravity has a relatively limited operating history. Our limited operating history and the unpredictability of the wealth management industry make it difficult for investors to evaluate our business. An investor in our securities must consider the risks, uncertainties and difficulties frequently encountered by companies in rapidly evolving markets.
We will need additional financing to implement our business plan. The Company will need additional financing to fully implement its business plan in a manner that not only continues to expand an already established direct-to-consumer approach, but also allows the Company to establish a stronger brand name in all the areas in which it operates. In particular, the Company will need additional financing to:
· | 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.
Our products and services are subject to changes in applicable laws and regulations. The Company’s business is particularly subject to changing federal and state laws and regulations related to the provision of financial services to consumers. The Company’s continued success depends in part on its ability to anticipate and respond to these changes, and the Company may not be able to respond in a timely or commercially appropriate manner. If the Company fails to adjust its products and services in response to changing legal and/or regulatory requirements, the ability to deliver its products and services may be hindered, which in turn could have an adverse effect on the Company’s business, financial condition and results of operations.
We may continue to encounter substantial competition in our business. The Company believes that existing and new competitors will continue to improve their products and services, as well as introduce new products and services with competitive price and performance characteristics. The Company expects that it must continue to innovate, and to invest in product development and productivity improvements, to compete effectively in the several markets in which the Company participates. The Company’s competitors could develop a more efficient product or service or undertake more aggressive and costly marketing campaigns than those implemented by the Company, which could adversely affect the Company’s marketing strategies and have an adverse effect on the Company's business, financial condition and results of operations.
Important factors affecting the Company's current ability to compete successfully include:
· | lead generation and marketing costs; |
· | service delivery protocols; |
· | branded name advertising; and |
· | product and service pricing. |
22 |
In periods of reduced demand for the Company's products and services, the Company can either choose to maintain market share by reducing product and service pricing to meet the competition, or maintain its product and service pricing, which would likely sacrifice market share. Sales and overall profitability may be reduced in either case. In addition, there can be no assurance that additional competitors will not enter the Company's existing markets, or that the Company will be able to continue to compete successfully against its competition.
We may not successfully manage our growth. Our success will depend upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our management and on our administrative, operational and financial resources. To manage this growth, we must expand our facilities, augment our operational, financial and management systems, and hire and train additional qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.
We rely on key executive officers, and their knowledge of our business and technical expertise would be difficult to replace . We are highly dependent on our executive officers. If one or more of the Company's senior executives or other key personnel are unable or unwilling to continue in their present positions, the Company may not be able to replace them easily or at all, and the Company’s business may be disrupted. Competition for senior management personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or attract and retain high-quality senior executives in the future. Such failure could have a material adverse effect on the Company's business, financial condition and results of operations.
We may never pay dividends to our common stockholders. The Company currently intends to retain its future earnings to support operations and to finance expansion; accordingly, the Company does not anticipate paying any cash dividends in the foreseeable future.
The declaration, payment and amount of any future dividends on common stock will be at the discretion of the Company's Board of Directors, and will depend upon, among other things, earnings, financial condition, capital requirements, level of indebtedness and other considerations the Board of Directors considers relevant. There is no assurance that future dividends will be paid on common stock or, if dividends are paid, the amount thereof.
Our common stock is quoted through the OTC Markets, which may have an unfavorable impact on our stock price and liquidity. The Company’s common stock is quoted on the OTC Markets, which is a significantly more limited market than the New York Stock Exchange or NASDAQ. The trading volume may be limited by the fact that many major institutional investment funds, including mutual funds, follow a policy of not investing in OTC Markets stocks and certain major brokerage firms restrict their brokers from recommending OTC Markets stocks because they are considered speculative and volatile.
The trading volume of the Company’s common stock has been and may continue to be limited and sporadic. As a result, the quoted price for the Company’s common stock on the OTC Markets may not necessarily be a reliable indicator of its fair market value.
Additionally, the securities of small capitalization companies may trade less frequently and in more limited volume than those of more established companies. The market for small capitalization companies is generally volatile, with wide price fluctuations not necessarily related to the operating performance of such companies.
Our common stock is subject to price volatility unrelated to our operations. The market price of the Company’s common stock could fluctuate substantially due to a variety of factors, including market perception of the Company’s ability to achieve its planned growth, operating results of the Company and of other companies in the same industry, trading volume in the Company’s common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company or its competitors.
Our common stock is classified as a “penny stock.”
Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. It is likely that the Company’s common stock will be a penny stock for the immediately foreseeable future.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the investor, make a reasonable determination that transactions in penny stocks are suitable for that person, and make a reasonable determination that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
23 |
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 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 |
* to be filed by amendment
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 15, 2018 | By: /s/ John Pollock |
John Pollock | |
Chief Executive Officer | |
(Principal Executive Officer) | |
Date: May 15, 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 | May 15, 2018 |
John Pollock | (Principal Executive Officer) | |
/s/ Paul Williams | Vice Chairman, CFO | May 15, 2018 |
Paul Williams | (Principal Financial Officer) | |
/s/ Dan Sundby | Director | May 15, 2018 |
Dan Sundby | ||
/s/ Edward A. Lyon | Director | May 15, 2018 |
Edward A. Lyon | ||
/s/ George Crumley | Director | May 15, 2018 |
George Crumley |
25 |