Financial Gravity Companies, Inc. 10-Q

Item 1 - Financial Statements Financial Gravity Companies, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2019 September 30, 2019 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 45,229 $ 36,053 Trade accounts receivable, net 134,501 147,377 Prepaid expenses and other current assets 39,264 12,010 Total current assets 218,994 195,440 OTHER ASSETS Property and equipment, net 135,913 139,991 Right to use lease asset 300,144 – Proprietary content, net 246,141 262,550 Non-compete agreements, net 3,495 5,260 Intellectual property 53,170 53,170 Goodwill 1,094,702 1,094,702 TOTAL ASSETS $ 2,052,559 $ 1,751,113 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable - trade $ 220,355 $ 174,749 Accrued expenses 105,777 146,872 Deferred revenue 66,685 94,733 Line of credit 62,019 63,919 Lease liability - current 86,535 – Notes payable 11,013 13,393 Total current liabilities 552,384 493,666 Notes payable - net of current 21,528 23,534 Lease liability - non-current 227,966 – Total non-current liabilities 249,494 23,534 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Common stock, $0.001 par value; 300,000,000 shares authorized; 41,524,589 shares issued and outstanding as of December 31, 2019 and 41,436,033 shares issued and outstanding as of September 30, 2019 41,525 41,436 Additional paid-in capital 7,420,313 7,391,592 Accumulated deficit (6,211,157 ) (6,199,115 ) Total stockholders’ equity 1,250,681 1,233,913 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,052,559 $ 1,751,113 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 December 31, 2019 2018 REVENUE Investment management fees $ 408,096 $ 422,430 Service income 433,654 576,835 Total revenue 841,750 999,265 OPERATING EXPENSES Cost of services 12,012 13,805 Professional services 115,333 64,814 Depreciation and amortization 26,022 28,802 General and administrative 98,831 146,952 Marketing 21,113 31,644 Salaries and wages 578,812 871,196 Total operating expenses 852,123 1,157,213 Net operating loss (10,373 ) (157,948 ) OTHER EXPENSE Interest expense (1,669 ) (41,424 ) Total other expense (1,669 ) (41,424 ) NET LOSS $ (12,042 ) $ (199,372 ) LOSS PER SHARE - Basic and Diluted $ (0.00 ) $ (0.01 ) The accompanying notes are an integral part of these consolidated financial statements. 4 Financial Gravity Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the three-month periods ended December 31, 2019 and 2018 (Unaudited) Number of Shares Issued and Outstanding Common Stock Par Value Amount Additional Paid-In-Capital Accumulated Deficit Total Balance at September 30, 2018 35,837,900 $ 35,838 $ 5,986,052 $ (5,575,630 ) $ 446,260 Stock based employee compensation expense – – 48,254 – 48,254 Net loss – – – (199,372 ) (199,372 ) Balance at December 31, 2018 35,837,900 $ 35,838 $ 6,034,306 $ (5,775,002 ) $ 295,142 Balance at September 30, 2019 41,436,033 $ 41,436 $ 7,391,592 $ (6,199,115 ) $ 1,233,913 Stock based employee compensation expense – – 3,810 – 3,810 Stock options exercised 12,799 13 (13 ) – – Private Placement stock issue 75,757 76 24,924 25,000 Net loss – – – (12,042 ) (12,042 ) Balance at December 31, 2019 41,524,589 $ 41,525 $ 7,420,313 $ (6,211,157 ) $ 1,250,681 The accompanying notes are an integral part of these consolidated financial statements. 5 Financial Gravity Companies, Inc. and Subsidiaries Three Months Ended December 31, CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (12,042 ) $ (199,372 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 26,022 28,802 Stock based compensation 7,085 48,254 Right of use of lease asset 23,136 – Changes in operating assets and liabilities: Receivables 12,877 15,191 Accounts receivable - related party – 1,791 Prepaid expenses (27,254 ) (1,403 ) Accounts payable - trade 45,605 48,822 Accrued expenses and other liabilities (30,013 ) 50,665 Deferred revenue (28,048 ) – Lease liability (23,136 ) – Net cash used in operating activities (5,768 ) (7,250 ) CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for purchase of property and equipment (3,770 ) (8,700 ) Net cash used in investing activities (3,770 ) (8,700 ) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings from lines of credit 1,502 – Proceeds from notes payable – 155,000 Payments on notes payable (4,386 ) (81,291 ) Payments on line of credit (3,402 ) (2,911 ) Proceeds from the sale of common stock 25,000 – Net cash provided by financing activities 18,714 70,798 TOTAL INCREASE IN CASH AND CASH EQUIVALENTS 9,176 54,848 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 36,053 32,220 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,229 $ 87,068 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest 1,689 39,959 Taxes – – The accompanying notes are in integral part of these consolidated financial statements. 6 Financial Gravity Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF BUSINESS Financial Gravity is a parent company of best of breed financial services companies including brokerage, wealth management, estate planning, family office services, risk management, business and personal tax planning, business consulting, and financial advisor services. Financial Gravity's mission is to synergistically bring together companies that create symbiotic advantages to each other in order to bring a complete financial experience to the clients that we serve. Financial Gravity Companies, Inc. and Subsidiaries (the “Company”) is located in Allen, Texas. The wholly-owned subsidiaries of the organization include: Financial Gravity Holdings, Inc. (dissolved February 13, 2019), Financial Gravity Operations, Inc. (dissolved February 12, 2019), Financial Gravity Tax, Inc (sold October 31, 2019)., Sofos Investments, Inc. (formerly Financial Gravity Wealth, Inc.), MPath Advisor Resources, LLC. (formerly Financial Gravity Business, LLC), Financial Gravity Ventures, LLC., Tax Master Network, LLC, and SASH Corporation (inactive and awaiting dissolution). 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 Trade accounts receivable are carried at the invoiced amount less an estimate made for doubtful accounts based on management’s review of outstanding balances. The collectability of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and a review of specific accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted and when management determines the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when received. The allowance for doubtful accounts was $0 as of December 31, 2019 and September 30, 2019, respectively. In the normal course of business, the Company may extend credit to its customers, on an unsecured basis, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable. Prepaid Expenses Prepaid expenses consist of expenses the Company has paid for prior to the service or good being provided. These prepaid expenses will be recorded as expense at the time the service has been provided. 7 Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to earnings over their estimated service lives by the straight-line method. Maintenance and repairs are charged to earnings as incurred; major repairs and replacements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations. Leases In February 2016, the FASB issued ASU 2016-02 Leases, which changed financial reporting as it relates to leasing transactions to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. In July 2018, the FASB issued ASU No. 2018-10 Codification Improvements to Topic 842, Leases and ASU No. 2018-11 Leases (Topic 842): Targeted Improvements. In March 2019, the FASB issued ASU No. 2019-1 Codification Improvements to Topic 842, Leases. The Company adopted these ASUs on October 1, 2019 on a modified retrospective basis. The Company did not elect the hindsight practical expedient and did elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases. The initial adoption of the standard recognized right-of-use assets of $323,097 and lease liabilities of $337,454 on the Company’s statement of financial position with no impact on the Company's results of operations. The Company had no significant changes to processes or controls. The Company leases all their office space through an operating lease, which expires at January 31, 2024. Many of the lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term. Lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses. Proprietary Content The proprietary content acquired as a part of the TMN purchase has been recognized in the accompanying consolidated balance sheets at $525,100, the value attributed to such content on the date of the purchase. The proprietary content is being amortized on a straight-line basis over an eight-year estimated life. During each of the three months ended December 31, 2019 and 2018, the Company recorded amortization expense of $16,410 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at December 31, 2019 was $278,959 and $262,550 at September 30, 2019. Non-compete Agreements Non-compete agreements entered into as a part of the TMN purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed to such agreements on the date of the purchase. The non-compete agreements are being amortized on a straight-line basis over the five-year term of the non-compete clause of the agreement. During each of the three months ended December 31, 2019 and 2018, the Company recorded amortization expense of $1,315 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at December 31, 2019 was $22,355 and $21,040 at September 30, 2019. 8 Intellectual Property The Company accounts for intellectual property in accordance with GAAP and accordingly, intellectual property are stated at cost. Intellectual property with indefinite lives are not amortized but are tested for impairment at least annually. Management has determined that the intellectual property have an indefinite life and do not consider the value of intellectual property recorded in the accompanying consolidated balance sheets to be impaired as of December 31, 2019 and September 30, 2019. Goodwill Goodwill represents the excess of the value of the purchase price and related costs over the identifiable assets from business acquisitions. The Company conducts an annual impairment assessment, at the reporting unit level, of its recorded goodwill. The Company assesses qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than it is carrying amount. The qualitative factors evaluated by the Company include: macro-economic conditions of the local business environment, overall financial performance, and other entity specific factors as deemed appropriate. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than it is carrying amount, a two-step impairment test is performed. Management determined, by assessing the qualitative factors, that it is more likely than not that the fair value of the reporting unit is greater than it carries value. Management does not consider the value of goodwill recorded for TMN in the accompanying consolidated balance sheets to be impaired as of December 31, 2019 and September 30, 2019. 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 December 31, 2019 and September 30, 2019. From time to time, the Company is audited by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes. The Company’s Federal returns since 2016 are still subject for examination by taxing authorities. Earnings Per Share Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Average number of common shares were 41,495,070 and 35,837,900 for the three months ended December 31, 2019 and 2018, respectively. For the three months ended December 31, 2019, approximately 2,161,605 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. For the three months ended December 31, 2018, approximately 3,840,121 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. 9 Revenue Recognition The Company derives its revenues primarily from six components: Investment Management Fees, Tax Master Network subscriptions, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales. Sofos Investments, Inc. 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. Investment management fees are calculated as a percentage of assets under management for the period. Investment management fees are Revenue is recognized as earned, at the end of each period. Fees are withdrawn from investor assets monthly, in arrears. Financial Gravity Tax, Inc. generates service income from its consulting and other professional services performed. Revenue recognized as service is provided. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up. Commission revenue is derived from the sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized when commissions are earned from insurers and issuers of the products. Commissions are received after products are issued and in force. Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets. Tax Master Network has five levels of services that are charged and collected on a month to month subscription basis. 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. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are tax planning strategies guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up. TBP sales are billed to the client after a preliminary assessment and client approval to move forward. Revenue recognized in 2020, that was included in the deferred revenue liability at the beginning of the year, is $61,400. Advertising Advertising costs are charged to operations when incurred. Advertising and marketing expense were $21,113 and $31,644 for the three months ended December 31, 2019 and 2018, respectively. Stock-Based Compensation The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations for employee grants, commissions for non-employee grants, and stock appreciation rights grants, on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rate of 2.89% rates in 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40%. 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. 10 Adjustments The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended September 30, 2019, included in its Annual Report on Form 10K. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand. On May 23, 2017, the Company and GHS Investments, LLC (“GHS Investments”) entered into an Equity Financing Agreement (the “Agreement”). The Agreement was filed as an exhibit to a registration statement on Form S-1, filed with the Securities and Exchange Commission on September 18, 2017. The Agreement contemplates a series of transactions, pursuant to which the Company will “put” shares of its common stock to GHS in consideration of the payment to the Company of eighty percent (80%) of the “Market Price” of such shares. “Market Price” shall mean the average of the two lowest trading prices of the Company’s Common Stock during the ten (10) consecutive trading days preceding the receipt of the applicable put notice. Accordingly, on each instance the Company exercises a put option, the Company will know in advance, both the number of shares issuable upon exercise of the put option, and the dollar amount of the purchase price for such shares. The maximum purchase price for shares to be purchased by GHS Investments under the Agreement is $11,000,000. To facilitate the sale of the shares so purchased by GHS Investments, the Company agreed to file a registration statement with the Securities and Exchange Commission. The Company also entered into a Registration Rights Agreement with GHS Investments, pursuant to which the Company has agreed to provide certain registration rights under the Securities Act of 1933, the rules and regulations promulgated thereunder, and applicable state securities laws. The Agreement will terminate (i) when GHS Investments has purchased an aggregate of $11,000,000 of the common stock of the Company, or (ii) 36 months after the effective date of the Agreement, or (iii) at such time that the registration statement is no longer in effect. Additionally, the Company is also actively seeking growth of its service offerings, both organically and via new client relationships. Management, in the ordinary course of business, is trying to raise additional capital through sales of common stock as well as seeking financing via equity or debt, or both from third parties. There are no assurances that additional financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead expenditures. The failure to adequately fund its capital requirements could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s stockholders and incurring additional indebtedness could involve an increased debt service cash obligation, the imposition of covenants that restrict the Company’s operations or the Company’s ability to perform on its current debt service requirements. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Future Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses, which amends how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, which applies to trade accounts receivable and the calculation of the allowance for uncollectible accounts receivable. The new standard will become effective for the Company for annual and interim periods beginning after December 31, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements. Since the Company currently uses an expected losses from customers method, the Company does not anticipate the adoption of ASU 2016-13 will have a material impact on the Company's financial condition or results of operations. 11 In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new guidance is effective for the Company beginning October 1, 2020. 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 2019 and September 30, 2019: Estimated Service Lives December 31, 2019 September 30, 2019 Furniture, fixtures and equipment 2 - 5 years $ 93,234 $ 93,073 Internally developed software 10 years 152,000 152,000 245,234 245,073 Less accumulated depreciation and amortization 109,321 105,082 $ 135,913 $ 139,991 Depreciation expense was $6,167 and $8,272 during the three months ended December 31, 2019 and 2018, respectively. 3. INTELLECTUAL PROPERTY Intellectual property consists of the following: Trademarks at September 30, 2018 $ 48,940 Trademarks purchased at cost 4,230 Trademarks at September 30, 2019 53,170 Trademarks purchased at cost – Trademarks at December 31, 2019 $ 53,170 12 4. LEASES At December 31, 2019, the remaining lease term and weighted average discount rate for operating leases was 4.3 years and 10%, respectively. For the three months ended December 31, 2019, the Company's cash paid for the operating lease was $23,136. The undiscounted annual future minimum lease payments consist of the following at: December 31, 2019 2020 $ 69,408 2021 92,544 2022 96,016 2023 105,898 2024 32,584 Total lease payments $ 396,450 Interest (81,949 ) Present values of lease liabilities $ 314,501 5. LINE OF CREDIT The Company has a revolving line of credit with Wells Fargo Bank, N.A. in the amount of $67,500. Amounts drawn under this line of credit are due on demand, and monthly interest and principal payments are required. The interest rate on the line of credit is 9.5%. This line of credit is collateralized by the personal guarantee of the majority stockholder. Line of credit balance was $62,019 and $63,919 at December 31, 2019 and September 30, 2019, respectively. 6 . NOTES PAYABLE On April 19, 2019 the Company entered into a Promissory Note Payable with Charles O’Banon (“O’Banon”), a customer, in the amount of $32,205. The note is in settlement of tax penalties and interest he incurred, that were proximately caused by the Company’s actions. The monthly principal and interest payments are $623, with a balloon payment of $14,048 in April 2022. The note is being repaid over 36 months and bears an interest rate of 6%. The Company has instituted abatement efforts on O’Banon’s behalf, with the taxing authority. Should the abatement efforts be successful, all monies paid O’Banon by the Company shall be returned. Should the abatement efforts result in mitigation, any monies paid by the Company, in excess of the mitigated amounts, shall be returned. The outstanding balance on December 31, 2019 and September 30, 2019 was $27,483, and $29,401 respectively. On April 12, 2019, the Company entered into a promissory note payable with a related party, John Pollock, the current EVP, in the amount of $15,000, and bears interest at 2.76%. The note was originally scheduled to be repaid in full by December 1, 2019. The Company is currently working on extending this repayment period. The outstanding balance on December 31, 2019 and September 30, 2019, was $5,058, and $7,529 respectively. 13 The Company’s maturities of debt subsequent to December 31, 2019 are as follows: 2020 $ 9,008 2021 6,229 2022 17,304 $ 32,541 7. ACCRUED EXPENSES Accrued expenses consist of the following at December 31, and September 30, 2019: December 31, 2019 September 30, 2019 Accrued payroll $ – $ 19,502 Accrued operating expenses 105,777 113,013 Deferred rent – 14,357 $ 105,777 $ 146,872 8. INCOME TAXES For the three months ended December 31, 2019 and 2018, 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 December 31, 2019 and September 30, 2019: December 31, September 30, Net deferred tax assets: Net operating loss carry-forward $ 1,185,045 $ 1,181,160 Property and equipment 7,787 6,921 Total 1,192,832 1,188,081 Net deferred tax liabilities: Intangible assets 10,513 10,319 Net 1,182,319 1,177,762 Less valuation allowance (1,182,319 ) (1,177,762 ) Net deferred taxes $ – $ – 14 9. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS Legal Proceedings From time to time, we are a party to or are otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. The legal proceedings that the Company is involved in, the outcomes are considered to be immaterial to our ability to operate or market our services, our consolidated financial position, results of operations or cash flows. 10. STOCKHOLDERS’ EQUITY Common Stock The Company is authorized to issue up to 300,000,000 shares of common stock, par value $0.001 per share. During the three months ended December 31, 2019 and 2018, the Company sold 75,757 shares and 0 shares, respectively, for $25,000 and $0, respectively. 15 11. STOCK OPTION PLAN Effective February 27, 2015, the Company established the 2015 Stock Option Plan (the “Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options and stock appreciation rights (SARs). The maximum number of shares of stock that may be issued pursuant to the exercise of options and SARs under the Plan is 9,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after February 27, 2018. Effective November 22, 2016, the Company established the 2016 Stock Option Plan (the “2016 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. 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. November 27, 2019 the Plan was amended to allow grant of Stock Appreciation Rights. During the three months ended December 31, 2019, one SAR was granted, and determinable. $3,385 in stock based compensation expense was recorded during the period for this SAR. The expense recorded to SAR liability, because there is a cash settlement option for the SAR’s. No other aspects of the plan were amended. 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, 2017 2,817,158 317,561 0.67 98 months Granted 895,000 119,736 0.27 110 months Exercised – – – – Canceled or expired 80,596 20,052 0.27 – Outstanding - September 30, 2018 3,631,562 417,245 0.58 98 months Granted 2,269,650 472,048 0.21 110 months Exercised – – – Canceled or expired 3,112,712 338,838 0.24 Outstanding - September 30, 2019 2,788,500 550,455 0.29 99 months Granted 500,000 0 0.44 120 months Exercised 12,799 139 0.06 97 months Canceled or expired 1,114,072 258,203 0.23 Outstanding - December 31, 2019 2,161,629 292,391 0.25 94 months Exercisable - December 31, 2019 1,642,381 0.17 86 months Total compensation expense, included in salaries and wages, of previously unamortized stock compensation was $7,085 and $48,254 for the three months ended December 31, 2019 and 2018, respectively. Unamortized share-based compensation expense as of December 31, 2019 amounted to $5,633 which is expected to be recognized over the next 1.5 years. 16 12. RELATED PARTY TRANSACTIONS Management fees paid to the largest stockholder of the entity, included as salaries and wages in the accompanying consolidated statements of operations were $0 and $43,500 for three months ended December 31, 2019 and 2018, respectively. Included in salaries and wages were consulting fees paid to a related party as a condition to the TMN acquisition. The agreement requires payments each month totaling $21,500. The total paid under this agreement in the three months ended December 31, 2019 and 2018 respectively, were $21,500 and $43,500. On April 12, 2019 the Company entered into a loan agreement with John Pollock, Executive Vice President of the Company. The note bears interest at 2.76%, and will be repaid in six equal installments of $2,520, beginning July 1, 2019. The balance of the loan at December 31, 2019 was $5,058 and at September 30, 2019 was $7,526 and is included in notes payable on the accompanying balance sheets. 17 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 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” included in the Annual Report on Form 10K for the fiscal year ended September 30, 2019. Plan of Operations Financial Gravity is a parent company of best of breed financial services companies including brokerage, wealth management, estate planning, family office services, risk management, business and personal tax planning, business consulting, and financial advisor services. Financial Gravity's mission is to synergistically bring together companies that create symbiotic advantages to each other in order to bring a complete financial experience to the clients that we serve. Financial Gravity’s Subsidiaries: Financial Gravity Holdings, Inc. Dissolved February 13, 2019. Financial Gravity Operations, Inc . Dissolved February 12, 2019. Sofos Investments, Inc. (formerly 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. Sofos is a Registered Investment Advisory 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 officially dead. The fiduciary rule, also known officially as the “Conflict of Interest” rule, stated advisers have to give conflict-free advice on retirement accounts, putting their clients’ needs ahead of their own potential compensation. Although the Department of Labor’s Fiduciary Rule was struck down by the Fifth Circuit Court, we will still maintain the fiduciary standard as a company, because we think it is best for the client. 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. 18 MPath Advisor Resources, LLC (formerly Financial Gravity Business, LLC) (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies. Financial Gravity Ventures, LLC This entity in the Company’s corporate family employs its merger 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 Master Network, LLC Tax Master Network “TMN” was a key acquisition in fiscal year 2016. TMN supports over 300 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 TMN 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. TMN also provides tax services through its “Tax Blueprint®” system which identifies several strategies for lowering the client's taxes. Financial Gravity Tax, Inc. has no current operations. It sold its bookkeeping and tax preparation business October 31, 2019, and all other operations are consolidated into TMN. 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 client list was sold to ADP in 2018. This entity is now inactive and awaiting dissolution. Results of Operations for the three months ended December 31, 2019 compared to the three months ended December 31, 2018 Revenues For the three months ended December 31, 2019, revenue decreased $157,515 to $841,750 from $999,265 for the three months ended December 31, 2018. The principal components of the decrease in revenue are: the sale Financial Gravity Tax, causing a decrease in revenue of $50,666, to $69,593 in revenue during the three months ended December 31, 2019 compared to $120,259 in the three months ended December 31, 2018; TBP Revenue decreased $86,000 to $24,000 for the three months ended December 31, 2019 compared to $110,000 in the three months ended December 31, 2018; Investment Management Fees decreased $14,335 to $408,096 for the three months ended December 31, 2019 compared to $422,430 for the three months ended December 31, 2018. 19 Operating Expenses Cost of services activity decreased $1,793 to $12,012 for the three months ended December 31, 2019 from $13,805 for the three months ended December 31, 2018. The cost of services is credit card processing fees. Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses increased $50,519 to $115,333 for the three months ended December 31, 2019 from $64,814 for the three months ended December 31, 2018. This increase is primarily due to an increase in legal fees of $45,856. Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $2,780 to $26,022 for the three months ended December 31, 2019 from $28,802 for the three months ended December 31, 2018. The decrease is due to some assets becoming fully depreciated. General and administrative expenses decreased $48,121 to $98,831 for the three months ended December 31, 2019 from $146,952 for the three months ended December 31, 2018. The decrease is primarily due to a decrease in technology expenses of $28,873 and a decrease in insurance expenses of $9,052. Marketing expenses decreased $10,531 to $21,113 for the three months ended December 31, 2019 from $31,644 for the three months ended December 31, 2018. The decrease is due to the Company shutting down some previous marketing channels, while new channels have yet to be identified and implemented. Salaries and wages expenses decreased $292,384 to $578,812 for the three months ended December 31, 2019 from $871,196 for the three months ended December 31, 2018. The overall decrease was principally due to decreases in Salaries and Wages – Outsourced, $160,465, Commissions, $118,999, and Stock based compensation, $41,169. The Company experienced a decrease in its net loss of $187,330 to a net loss of $12,042 for the three months ended December 31, 2019 from a net loss of $199,372 for the three months ended December 31, 2018, 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. The Company derives its revenues primarily from six components: Investment Management Fees, Tax Master Network subscriptions, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales. 20 Sofos Investments, Inc. 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. Investment management fees are calculated as a percentage of assets under management for the period. Investment management fees are Revenue is recognized as earned, at the end of each period. Fees are withdrawn from investor assets monthly, in arrears. Financial Gravity Tax, Inc. generates service income from its consulting and other professional services performed. Revenue recognized as service is provided. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up. Commission revenue is derived from the sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized when commissions are earned from insurers and issuers of the products. Commissions are received after products are issued and in force. Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets. Tax Master Network has five levels of services that are charged and collected on a month to month subscription basis. 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. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are tax planning strategies guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up. TBP sales are billed to the client after a preliminary assessment and client approval to move forward. Revenue recognized in 2020, that was included in the deferred revenue liability at the beginning of the year. Services income is recognized as consulting and other professional services are performed by the Company. Income is recognized as services are delivered. Commission revenue is derived from the sale of premiums on life insurance policies held by third parties. The revenue is recognized as received from the insurer, issuer. 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. Tax Master Network has 3 types of services that are charged and collected on a month to month subscription basis (Tax Master Network 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 only for subscription revenues not received in the period they apply to. The allowance for doubtful accounts was $0 and $0 as of December 31, 2019 and September 30, 2019, 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. 21 Stock-Based Compensation. The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations for employee grants, commissions for non-employee grants, and stock appreciation rights grants, on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rate of 2.89% rates in 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40%. Liquidity and Capital Resources As of December 31, 2019, the Company had cash and cash equivalents of $45,229. The increase of $9,176 in cash and cash equivalents from September 30, 2019 was due to net cash used in operating activities of $5,768 and net cash used in investing activities of $3,770, and net cash provided by financing activities of $18,714. Net cash used in operating activities was $5,768 for the three months ended December 31, 2019, compared to $7,250 net cash used in operating activities for the three months ended December 31, 2018. The net cash provided by operating activities for the three months ended December 31, 2019 was due to net loss of $12,042 adjusted primarily by the following: (1) depreciation and amortization of $26,022, stock based compensation of $7,085, decrease in Right of use of lease asset of $23,166, increase in accounts payable of $45,605, increase in prepaid expenses of $27,254, an decrease in accrued expenses of $30,013, an decrease in deferred revenue of $28,048, decrease in trade accounts receivable of $12,877 and a decrease in the Lease liability $23,136. Net cash provided by financing activities was $18,714 for the three months ended December 31, 2019, compared to net cash provided by financing activities of $70,798 for the three months ended December 31, 2018. Financing activities for the three months ended December 31, 2019 consisted primarily of proceeds from the sale of common stock of $25,000, $1,502 in proceeds from the line of credit; offset with payments made to reduce the Company’s debt obligations in the amount of $7,788. As shown below, at December 31, 2019, our contractual cash obligations totaled approximately $89,502, all of which consisted of debt principal. Payments due by period Contractual obligations Less than 1 year 1-3 years 4-5 years Total Notes payable $ 11,013 $ 21,528 $ – $ 32,541 Lease liability 92,544 263,176 32,584 388,304 Line of Credit 62,019 – – 62,019 Total contractual cash obligations $ 165,576 $ 284,704 $ 32,584 $ 482,864 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. 22 Off Balance Sheet Transactions and Related Matters Other than operating leases discussed in Note 4 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.