Financial Gravity Companies, Inc. 10-K

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES. Market Information The Company’s Common Stock is currently traded in the over-the-counter market and quoted under the symbol FGCO. The following are the high and low sales prices for the Company’s Common Stock for the periods reflected below: Fiscal Year Ended September 30, 2016 High Low First Quarter $ 1.00 $ 0.02 Second Quarter $ 1.00 $ 0.01 Third Quarter $ 1.00 $ 0.01 Fourth Quarter $ 0.01 $ 0.01 Fiscal Year Ended September 30, 2017 High Low First Quarter $ 3.34 $ 0.01 Second Quarter $ 2.50 $ 0.85 Third Quarter $ 1.06 $ 0.08 Fourth Quarter $ 1.05 $ 0.60 The above prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. Holders The approximate number of stockholders of record of the Company’s Common Stock on February 15, 2018 was 1,689. Dividends The Company has never paid any cash dividends on its common stock, and it is anticipated that none will be paid in the foreseeable future. Recent Sales of Unregistered Securities During the year ended September 30, 2017, the Company issued an additional 725,000 shares of common stock to a number of accredited investors pursuant to the private placement, for an aggregate price of $725,000. Subsequent to September 30, 2017, an aggregate of 100,000 shares of the Company’s common stock have been sold for $100,000. Additionally, an aggregate of 50,000 warrants to purchase the Company’s common stock have been issued in conjunction with the sale of the Company’s common stock. Subsequent to September 30, 2017, an aggregate of 372,500 options to purchase the Company’s common stock have been granted. The sales of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, the Company believes that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. Each investor represented that such investor either (A) is an “accredited investor,” (B) has such knowledge and experience in financial and business matters that the investor is capable of evaluating the merits and risks of acquiring the shares of the Company’s common stock, or (C) appointed an appropriate person to act as the investor’s purchaser representative in connection with evaluating the merits and risks of acquiring the shares of the Company’s common stock. The investors received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. 6 The Company’s option grants were effected pursuant to Rule 701 promulgated under the Securities Act. Repurchases of Equity Securities The Company did not repurchase any of its equity securities during the years ended September 30, 2017 or 2016. Item 6. SELECTED FINANCIAL DATA. Not applicable. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand its historical results of operations during the periods presented and its financial condition. This MD&A should be read in conjunction with its financial statements and the accompanying notes, and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause its actual results to differ materially from management’s expectations. See the sections entitled “Forward-Looking Statements” and “Risk Factors” above. Plan of Operations Financial Gravity Companies, Inc. (“Financial Gravity”, “We” or the “Company”), based in Allen, Texas, was formed specifically to be the parent company of several subsidiaries that provide integrated tax, business, and financial solutions. Financial Gravity’s clients include small businesses, small business owners and high net worth individuals. The Company’s services are focused on helping clients make more money and build wealth, most often with tax savings, lowering costs and improving efficiency. In addition to expanding through client procurement and organic growth, Financial Gravity intends to make a number of acquisitions. The primary acquisition targets currently include accounting, bookkeeping, and financial advisory firms. In fiscal year 2015 the Company acquired two firms: Cloud9 Holdings Company (and its subsidiary Cloud9b2b) which was renamed Financial Gravity Business and Sash Corporation, doing business as Metro Data Processing (a Tulsa, OK payroll processor). In fiscal year 2016 the Company acquired Tax Coach Software LLC. The Company is actively identifying additional potential acquisition candidates to fuel more rapid growth. Financial Gravity’s Subsidiaries: Financial Gravity Holdings, Inc. This entity was created to engage in the acquisition and integration of financial and other businesses which will deliver a wide range of accounting, tax planning and management services to high net worth individuals and businesses in the Dallas/Fort Worth region, with further expansion into other markets in accordance with its long-term growth rate and strategic business plan. Financial Gravity Operations, Inc. This entity was created to raise capital to take the company public, and will be eliminated now that the public transaction is complete. This entity integrates the delivery of Financial Gravity Tax, Business, and Wealth Solutions to its growing customer base around the country. This integration, impossible to do for the small business marketplace until now, is what sets Financial Gravity apart from its peers. This integration will now be handled by Financial Gravity Companies, Inc. Financial Gravity Tax Financial Gravity has developed a precise procedure that has proven to be very successful in delivering lower taxes, higher profit, and greater wealth for small business owners. The process begins with an extensive and comprehensive review of the client’s needs. This assessment sets the requirements for the program that is subsequently developed. Next, Financial Gravity designs a unique "Tax Blueprint®" which identifies several strategies for lowering the client's taxes. The second step is to use the client’s custom Tax Blueprint® to build that business entity and documentation that captures the identified savings. This is called the Tax Operating System® (TOS). This process is repeated as required and tuned for optimal efficiency thus ensuring that the client receives the best service and optimal solutions in the phases of the business cycle during the year. Clients continue to pay a monthly or weekly subscription fee as part of their TOS service for ongoing tax planning, tax return preparation, payroll and bookkeeping services. 7 This business unit promises clients they’ll pay the lowest legal, moral and ethical taxes possible. Tax savings is the “tip of the spear” in all its offerings. No company has ever successfully married tax, wealth and business solutions together for Small Business Owners (SBOs) and high net worth individuals. Powered by its no-risk “2x Promise” (the Company guarantee’s to find double its initial fee in tax savings), clients are quick to sign up for proactive tax planning. Lowering their personal taxes then fuels insurance, wealth and business services sales. These multi-tiered sales provide a 4-8 times multiple to a typical accounting or bookkeeping practice. SBO’s look for two things from a typical CPA and bookkeeping firm, (1). Lower personal income taxes; and (2). Numbers that help them run/grow their business better. There is no national firm that provides these two services at any level. Its tax planning sets us apart from typical accounting and tax preparation firms. The Company looks forward to setting up a client’s business to be tax efficient. The typical service model employed by CPA firms is oriented more toward compliance, which is the recording of historical data. These providers work on historical records instead of looking forward to proactively plan. SBOs are growing more and more frustrated with accountants who “put numbers in boxes” when what’s truly needed is a partner to help advise them in how to be more efficient in their business. Many SBOs can’t read a P/L or Balance Sheet and even when they can, the data is often too old to act on. As technology speeds up the pace of business real time data is becoming more important. Most CPAs don’t even calculate tax savings for their clients, as asking CPA’s to produce unique data to each client is outside the factory mentality of the profession. The average tax savings is over $20,000 per year per business owner. Financial Gravity Tax is pursuing several M&A and/or partnership opportunities to deliver on the product Bookkeeping with Purpose®, that will help deliver the promised tax savings and producer actionable real time data. Financial Gravity Wealth After saving thousands in taxes, clients are happy to trust us with the management of their wealth, especially when treated to a different wealth management experience. Financial Gravity Wealth is a Registered Investment Advisory (RIA) firm. An RIA is an advisor or firm engaged in financial planning and wealth management business and is registered either with the Securities and Exchange Commission (SEC) or state securities authorities. An RIA has a fiduciary duty to his or her clients, which means that he or she has a fundamental obligation to provide suitable investment advice and always act in the clients' best interests. The Department of Labor’s Fiduciary Rule is a new ruling, scheduled to be phased in April 10, 2017 – Jan. 1, 2018, that will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to meet the standards of that status. While the impact of this rule is uncertain, the Company is positioned to do what it have always done, control advisor fees and reduce one of the biggest “fees” in a mutual fund and ETF portfolio, which is “tax friction”. These taxes erode about 1% per year in performance. Only 5% of all financial planners are RIAs. The advantage of the RIA model is lower cost to the client. Also, since RIAs are not compensated by commissions on financial products, their advice is considered less biased and more accurate. Coupled with tax savings, its status as an RIA makes the Company very attractive to the most profitable clients. Financial Gravity Business The complexity of Advanced Tax Planning next fuels Financial Gravity Business services. The first product that was developed with a partner is Advisor Architect. This product is designed to help financial advisors and accountants run their businesses better. The Company intends to test the service offering / coaching program with the first two markets where it has the most experience and then roll out the service offering to other industries at a later date. Clients spend some of their tax savings from Financial Gravity Tax planning for these services, rendering them “cost neutral”. The Company has also developed its Partner Programs that teach financial advisors how to serve an underserved community, the Small Business Owner. Financial Gravity Business is the only non-product centric business system for financial advisors that helps them serve the needs of the small business owner without needing to sell a financial services product like a life insurance policy or a 401(k) plan. To broaden the skillset of CPAs, the Company has created the Certified Tax Master® designation and partner program for CPA’s and Enrolled Agents (“EA’s”). To its knowledge, there is no program offering like this of its kind available elsewhere. This program was created in Financial Gravity Business, but will be sold and build revenue in the Tax Coach Software platform. Financial Gravity Ventures This entity in the Company’s corporate family employs its M&A strategy to acquire talent and build wealth for Financial Gravity Companies, Inc. and acquired companies. As mentioned earlier, Financial Gravity is pursuing several acquisition opportunities. 8 Tax Coach Software Tax Coach Software (TCS) was a key acquisition in fiscal year 2016. TCS supports over 550 CPA and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. Not only did this acquisition bring high-end tax planning to Financial Gravity, but the TCS customer base adds significant business development opportunities for Financial Gravity Wealth. The Company developed the Certified Tax Master® for this group and rolled out new client systems in mid-2016. Sash Corporation Sash Corporation dba Metro Data Processing, based in Tulsa, OK was the Company’s first acquisition and Metro Data Processing is based in Tulsa, OK. The Company has been a fixture in payroll processing in the Tulsa area for years and should prove to be a compelling storefront to begin selling additional tax services. The Company goes to market primarily via Financial Advisors and accountants. Its Partner Program is proven to provide financial professionals with recognized trademarked service offerings, business support, and marketing materials. These trademarks/servicemarks include Financial Gravity®, Tax Blueprint®, Tax Operating System®, Bookkeeping with Purpose®, Diversity Trinity®, Investor Peace University®, Factor Based Investing™, Fractional Family Office®, TaxCoach™, and Certified Business Strategist™ offerings, allowing financial professionals in its Partner Program to add additional value to their clients and their business. Over the past few years the Company has undertaken significant effort, and invested considerable capital, in order to attract and maintain a qualified and capable staff, develop proprietary solutions, and implement systems, procedures, and infrastructure to execute the business plan on a large scale. Given the short time frame this current market opportunity has existed and due to the complexity of the model, the Company has a significant competitive advantage over others who may try to execute the same business plan. Significant effort and investment capital has been incurred by the Company over the past few years in order to attract and maintain a qualified and capable staff, develop proprietary solutions, and implement systems, procedures, and infrastructure to execute the business plan on a large scale. Given the short time frame this current market opportunity has existed and due to the complexity of the model, the Company has a significant competitive advantage over others who may try to execute the same business plan. Results of Operations for the year ended September 30, 2017 compared to the year ended September 30, 2016 Revenues For the year ended September 30, 2017, revenue increased $773,500 or 28% to $3,530,499 from $2,756,999 for the year ended September 30, 2016. The increase in revenue reflects increase in service income and investment management fees primarily due to new customer product and service sales and increased assets under management. Operating Expenses Cost of services activity remained relatively stable for the years ended September 30, 2017 and 2016. Professional services expenses include merger costs, legal expense, professional fees, contract labor, business consulting, computer and internet expense, and earnest money forfeited. Professional services expenses decreased $240,104 or 19% to $997,117 for the year ended September 30, 2017 from $1,237,221 for the year ended September 30, 2016. This decrease is primarily attributable to reduced legal fees incurred and reduced merger costs. Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $53,803 to $99,744 for the year ended September 30, 2017 from $153,547 for the year ended September 30, 2016. The decrease is primarily due to the fact that the Tax Coach Software prospect list was fully amortized by September 30, 2016. Impairment of goodwill of $662,967 for the year ended September 30, 2016 was a result of the impairment of goodwill from the acquisitions of Cloud9B2B and MDP. 9 General and administrative expenses increased $339,944 or 83% to $748,481 for the year ended September 30, 2017 from $408,537 for the year ended September 30, 2016. The increase is primarily due to an increase in costs associated with the growth of the partner program. Management fees – related party expenses decreased $13,333 or 6.25% to $200,000 for the year ended September 30, 2017 from $213,333 for the year ended September 30, 2016. Marketing expenses decreased $26,903 or 7% to $375,499 for the year ended September 30, 2017 from $402,402 for the year ended September 30, 2016. During the year ended September 30, 2016, the Company began doing Press Releases and advertising on Facebook. In addition, the Company engaged several consultants to assist leadership and build new business funnels in an effort to continue to grow revenue streams. Salaries and wages expenses increased $230,848 or 13% to $1,961,126 for the year ended September 30, 2017 from $1,730,278 for the year ended September 30, 2016. During the year ended September 30, 2017, the number of clients increased which resulted in higher commissions paid. Furthermore, commission rates increased in 2016 as sales representatives moved from salary plus commission to 100% commission. The Company experienced an increase in its bottom line of $1,159,164 or 54% to a net loss of $975,975 for the year ended September 30, 2017 from a net loss of $2,135,139 for the year ended September 30, 2016, primarily attributable to the reasons noted above. Significant Accounting Policies Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements. Use of Estimates and Assumptions. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition and Accounts Receivable. Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments. Services income is recognized as consulting and other professional services are performed by the Company. Commission revenue is derived from the sale of premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy is issued. Revenue represents gross billings less discounts, net of sales tax, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets. TaxCoach Software has 3 types of services that are charged and collected on a month to month subscription basis (TaxCoach basic membership, All-Stars coaching, and Wire Service weekly broadcast email). None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships. Trade accounts receivable are carried at the invoiced amount less estimate made for doubtful accounts based on management’s review of outstanding balances. The collectability of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and review of specific accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted and when management determines the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when received. The allowance for doubtful accounts was $17,014 and $-0- as of September 30, 2017 and 2016, respectively. In the normal course of business, the Company extends credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable. 10 Stock-Based Compensation. The Company recognizes the fair value of the stock-based compensation awards as wages in the accompanying statements of operations on a straight-line basis over the vesting period based on the Black-Scholes option pricing model based on a risk-free rate from 0.85% to 1.41% in 2017 and 0.97% in 2016, dividend yield of 0%, expected life of 2 years and volatility of 43% - 137%. Liquidity and Capital Resources As of September 30, 2017, the Company had cash and cash equivalents of $444,420. The increase of $311,617 in cash and cash equivalents from September 30, 2016 was due to net cash used in operating activities of $745,311, net cash used in investing activities of $1,536 and net cash provided by financing activities of $1,058,464. Net cash used in operating activities was $745,311 for the year ended September 30, 2017, compared to $1,291,503 net cash used in operating activities for the year ended September 30, 2016. The net cash used in operating activities for the year ended September 30, 2017 was due to net loss of $975,975, adjusted primarily by the following: (1) increases in depreciation and amortization of $99,744, common stock transactions of $163,273, accounts payable – trade of $24,585, accrued expenses of $18,898, and deferred revenue of $62,862, (2) offset by decreases in trade account receivable of $30,952, prepaid expenses of $32,364, and pre-merger payables of $75,382. Net cash used in investing activities was $1,536 for the year ended September 30, 2017, compared to net cash provided by investing activities of $44,541 for the year ended September 30, 2016. The Company purchased more equipment and trademarks during the year ended September 30, 2017 compared to September 30, 2016, but in 2016, $57,025 of cash was acquired from acquisition of subsidiaries. Net cash provided by financing activities was $1,058,464 for the year ended September 30, 2017, compared to net cash provided by financing activities of $578,223 for the year ended September 30, 2016. Financing activities for the year ended September 30, 2017 consisted primarily of $725,000 in proceeds from sales of common stock and $450,000 in proceeds from notes payable. As shown below, at September 30, 2017, its contractual cash obligations totaled approximately $520,693 all of which consisted of operating lease obligations and debt principal. Payments due by period Contractual obligations Less than 1 year 1-3 years 4-5 years More than 5 years Total Notes payable $ 165,562 $ 281,031 $ – $ – $ 446,593 Operating leases 68,400 5,700 – – 74,100 Total contractual cash obligations $ 233,962 $ 286,731 $ – $ – $ 520,693 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need additional financing to fund additional material capital expenditures and to fully implement its business plan. There are no assurances that additional financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead expenditures as a way to supplement the cash flows generated by operations. The Company has a backlog of fees under contract in addition to the Company’s accounts receivable balance. The failure to adequately fund its capital requirements could have a material adverse effect on its business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s stockholders, and incurring additional indebtedness could involve the imposition of covenants that restrict its operations. Management, in the normal course of business, is trying to raise additional capital through sales of common stock as well as seeking financing from third parties, via both debt and equity, to balance the Company’s cash requirements and to finance specific capital projects. Off Balance Sheet Transactions and Related Matters Other than operating leases discussed in Note 8 to the consolidated financial statements, there are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company. 11 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risk. The Company’s business is leveraged and, accordingly, is sensitive to fluctuations in interest rates. Any significant increase in interest rates could have a material adverse effect on its financial condition and ability to continue as a going concern. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements required by this item are included in this report in Part IV, Item 15. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.