FGCO Financial Gravity Companies Inc (PK)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF BUSINESS

Financial Gravity Companies, Inc. and Subsidiaries (the “Company”) located in Allen, Texas. The wholly-owned subsidiaries of the organization include: Sofos, Inc. (formerly Financial Gravity Wealth, Inc.), MPath Advisor Resources, LLC. (formerly Financial Gravity Business, LLC), TMN, LLC, Forta Financial Group, Inc. and SASH Corporation (inactive and awaiting dissolution).

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.

Sofos, Inc. (formerly Financial Gravity Wealth, Inc.) (“Sofos”) Sofos is a registered investment advisor, located in Allen, Texas. Sofos provides asset management services.

TMN was acquired effective October 1, 2015 and is an Ohio limited liability company. The purchase was made by FGH. TMN, located in Cincinnati, Ohio, provides three primary services including monthly subscriptions to the “Tax Coach” software system, coaching and email marketing services.

Forta Financial Group, Inc. was acquired effective May 21, 2020 and is a securities broker dealer, a registered investment advisor and a licensed insurance agency. The Company is a registered broker-dealer with the Securities and Exchange Commission (''SEC") and with the Financial Industry Regulatory Authority ("FINRA"). The Company is also a member of the Securities Investor Protection Corporation ("SIPC"). The Company's securities activities is limited to introducing and forwarding securities on a fully disclosed basis to a carrying broker-dealer. The Company as a matter of policy does not hold funds or securities for customers or owe money or securities to customers. Pursuant to Rule 15c3-1 of the Securities Exchange Act of 1934, the Company is required to maintain minimum net capital of $100,000 and ratio of aggregate indebtedness to net capital shall not exceed 15 to 1. On September 30, 2020, the Company's net capital was $427,728 and the aggregate indebtedness to net capital was 86.77%. The Company is exempt from certain provisions of Rule 15c3-3 of the Securities Exchange Act of 1934. Such exemption is in accordance with paragraph (k) (2) (ii) of the Rule.

SEGMENT REPORTING

We manage our business in four reportable segments. Each of our subsidiaries is treated as a segment. We evaluate the performance of our operating segments based on a segment’s share of consolidated operating income Therefore, for instance, the tax unit was sold for $150,000 in October of 2019 (for $150,000) because the Company did not see growth potential in the unit’s accounting and direct tax advice operations. Certain growth operations of the tax unit, including the tax operating system, have been taken over by TMN.

BUSINESS ACQUISITION

On September 30, 2019, the Company entered into a merger agreement with Forta Financial Group, Inc. (“Forta” or “FFGI”, formerly, Presidential Brokerage, Inc.), to acquire 100% of the stock of Forta in exchange for 45,785,879 shares of Company common stock. Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation. The acquisition transaction closed on May 21, 2020. Forta’s financial performance is included in Company’s consolidated statements starting as of May 21, 2020.

The Company acquired Forta in May of 2020 in exchange for stock. A liability of $699,117 has been recorded for 4,178,564 shares of common stock related to the acquisition remaining to be issued as of September 30, 2020. Forta is a broker dealer, and its acquisition presented the Company with an opportunity to compete in the broker dealer market, and to try to grow in this area of financial services. Forta also has key employees who assumed vital executive leadership roles within the Company, including key executives who will focus on improving operations and growth opportunity. Forta also contributed key operating assets, including in excess of $700,000 in cash, and annual revenues in excess of $3,000,000.

Identification of Company as the Acquirer

The acquisition was primarily effected by a merger and an exchange of Company’s common stock as the consideration paid to Forta stockholders by Company for their equity interests in Forta. We looked at all pertinent facts and circumstances identified in ASC 805-10-25-1, ASC 805-10-05-4 to be considered in identifying the acquirer in a business combination effected by exchanging equity interests. The standard recognizes that the acquirer usually is the entity that issues its equity interests, but that in some business combinations the issuing entity is the acquiree. In these situations, the accounting acquiror is different than the legal acquiror.

The guidance provides the following factors to consider in identifying the accounting acquiror in a business combination like the acquisition that is effected by exchanging equity interests:

The majority shares ended up being held by Forta shareholders. The original calculation was to be an even 50% for Forta and Company shareholders. However, the calculations included shares that were granted through the option plan at Company, and it was assumed that each of the option share grants would be exercised. As it turned out, the vast majority of the option shares were not exercised, so that ended up skewing the majority calculation in favor of the Forta shareholders. There were no other special or unusual voting arrangements, convertible securities or other financial instruments of the combined Company immediately after the acquisition.

After the acquisition, the largest single minority interest would be held by a Company shareholder, John Pollock, and members of the Board of Directors and management of Company, some of whom were shareholders of Forta, would end up owning in excess of 40% of the voting shares of Company.

There is no agreement on the election of Board members, and neither Forta nor Financial Gravity shareholders have any agreement to elect a majority of the Board. The factor is neutral.

The composition of the senior management of the combined entity. Senior management is from Financial Gravity. Based upon the above, the Company has concluded that Financial Gravity will be treated as the acquirer.

Purchase Price Allocation

The purchase price of $7,652,415 was based upon the share price of Company’s stock as of May 21, 2020 and $52,000 note payable. We have used preliminary fair value estimates for the assets acquired and liabilities assumed for the acquisition. We believe significant synergies may arise from this acquisition, as a result of which the purchase price was in excess of the fair value of the net assets acquired and, as a result, we have preliminarily recorded goodwill of $7,380,603, which is based upon book value, to account for adjustments made. We have not yet finalized estimates that relate to certain tangible and intangible assets, including customer relationships, trade names, contracts. Our estimates and assumptions for these acquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods (up to one year from the acquisition date).

The accompanying unaudited pro forma condensed combined financial statement of Financial Gravity Companies, Inc. (“Financial Gravity”, “FGCO” or the “Company”) is presented to illustrate the estimated effects of the acquisition of 100% of the stock of Forta Financial Group, Inc. (“Forta” or “FFGI”), which closed on May 21, 2020 (the “acquisition” or the “transaction”) on the historical financial position and results of operations of the Company. The unaudited pro forma condensed combined statement of operations is based upon and derived from and should be read in conjunction with Company’s and Forta’s historical audited financial statements for the year ended September 30, 2020

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Forta’s results of operations have been included in the following financial statement for the twelve months ending September 30, 2020 prospectively from the assumed date of acquisition of October 1, 2019. Pro forma results have been prepared by adjusting historical results to include Forta’s results of operations. The unaudited pro forma results presented do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of October 1, 2019, nor does it indicate the results of operations in future periods. Additionally, the unaudited pro forma results do not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions on revenues, reduction of expenses, asset dispositions, or other factors. The impact of these items could alter the following pro forma results:

Rounded up 

A Derived from unaudited statement of operations of Company for the twelve months ended September 30, 2020.

B Based upon anticipated operations for the period prior to the May 21, 2020 taking into account synergies that would have been provided by Company, Sofos and MPath.

BUSINESS DISPOSITION

The tax unit provided Company’s proprietary the tax operating system, but that could be run more effectively by TMN, so the decision was made to transfer that activity to the TMN. The tax unit was left with minor tax and accounting operations, and those activities did not present a significant upside to the Company. As a result, the Company disposed of its tax unit.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting polices consistently applied in the preparation of the accompanying consolidated financial statement in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is as follows.

Basis of Consolidation

The consolidated financial statements include the accounts of Financial Gravity Companies, Sofos, MPath, TMN and Forta (collectively referred to as the “Company”). All significant intercompany accounts and transactions have been eliminated on consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an initial maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash balances at several financial institutions located throughout the United States, which at times may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

Trade Accounts Receivable

Trade accounts receivable are carried at the invoiced amount less an estimate made for doubtful accounts based on management’s review of outstanding balances. The collectability of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and a review of specific accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted and when management determines the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when received. The allowance for doubtful accounts was $0 and $0 as of September 30, 2020 and 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 they are exposed to any significant risk of loss on accounts receivable.

Prepaid Expenses

Prepaid expenses consist of expenses the Company has paid for prior to the service or good being provided. These prepaid expenses will be recorded as expense at the time the service has been provided.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to earnings over their estimated service lives by the straight-line method.

Maintenance and repairs are charged to earnings as incurred; major repairs and replacements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

Property and equipment operated under material leases which transfer substantially all benefits and risks associated with the assets to the Company are capitalized. An asset and liability equal to the present or fair value, if appropriate, of minimum payments over the term of the leases are recorded. Amortization of the asset is computed using the straight-line method. Expenses associated with all other leases (operating leases) are charged to expense as incurred.

Customer Relationships

The customer relationships acquired from the TMN purchase have been recognized in the accompanying consolidated balance sheets at $44,900, the value attributed to it on the date of the purchase. The customer relationships are being amortized on a straight-line basis over a four- year estimated life. During the years ended September 30, 2020 and 2019, the Company recorded amortization expense of $0 and $11,225 respectively on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at September 30, 2020 and 2019 was $44,900. This has been fully amortized as of September 30, 2019.

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 it on the date of the purchase. The proprietary content is being amortized on a straight-line basis over an eight- year estimated life. During the years ended September 30, 2020 and 2019, the Company recorded amortization expense of $114,955 and $65,638, respectively, on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at September 30, 2020 and 2019 was $377,505 and $262,550, respectively.

Future amortization of proprietary content is estimated to be as follows for the years ended September 30:

Trade Name

The trade name acquired as a part of the TMN purchase has been recognized in the accompanying consolidated balance sheets at $69,300, the value attributed to it on the date of the purchase. Management has determined that the trade name had no future value and considers the value of the trade name recorded in the accompanying consolidated balance sheet to be impaired as of September 30, 2019. Accordingly, this asset was fully written off.

Non-compete Agreements

Non-compete agreements established as a part of the TMN purchase have been recognized in the accompanying consolidated balance sheets at $26,300, and amortization of the non-compete agreements was $5,260 for each of the years ending September 30, 2020 and 2019. The non-compete agreements were fully amortized as of September 30, 2020.

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 sheet to be impaired as of September 30, 2020 and 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 September 30, 2020, and 2019.

Goodwill consists of the following:

Income Taxes

The Company accounts for Federal and state income taxes pursuant to GAAP, which requires an asset and liability approach for financial accounting and reporting for income taxes based on tax effects of differences between the financial statement and tax basis of assets and liabilities.

The Company accounts for all uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 – Income Taxes (“ASC 740”). ASC 740 provides guidance on de-recognition, classification, interest and penalties and disclosure related to uncertain income tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no accrued interest or penalties as of September 30, 2020 and 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 57,138,793 and 37,825,239 for years ended September 30, 2020 and 2019, respectively.

For the years ended September 30, 2020 and 2019, approximately 6,972,696 and 2,788,476 common stock options, respectively, and 0 and 25,000 warrants, respectively, were not added to the diluted average shares because inclusion of such shares would be antidilutive.

Revenue Recognition

The Company adopted the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates (“ASU”) ASU 2014-09, Revenue from Contracts with Customers October 1, 2019 on a modified basis. As the initial adoption of the standard did not have a material impact on the Company's financial condition or results of operations, no cumulative effect was recognized at the date of initial application. The Company also had no significant changes to systems, processes, or controls.

The Company derives its revenues primarily from the following activities: Investment Management Fees, Securities Brokerage Commissions, Tax Master Network subscriptions, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales.

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. Fees are generally paid quarterly, in advance, for each quarter or monthly in arrears. Revenues are earned over the period in which the service is provided, which is typically monthly.

The Company generates services income which is recognized when consulting and other professional services are performed by the Company (primarily from TMN and MPath). Income is recognized as services are delivered.

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.

Trade accounts receivable are carried only for investment management fees that are paid in arrears. The allowance for doubtful accounts was $0 and $0 as of September 30, 2020 and 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.

Sofos 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. Revenue is recognized as earned, at the end of each period.

Forta generates commission revenue from the sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized when commissions are received from insurers and issuers of the products.

MPath generates revenue from insurance marketing services for insurance agents, including sourcing of insurance policies through selling agreements.

Tax Master Network has five levels of network subscription services that are charged and collected on a month-to-month. 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. A contract liability is recognized when the customer payment is received. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement.

The Company received revenue from Sofos’ operations that are primarily from investment management fees, including money management fees. investment management fees are based upon a percentage of assets under management and totaled $1,352,975 (or, $1,255,457 after inter-company eliminations of $140,420)) for the fiscal year.

The Company received revenue from Forta’s operations from (the date of the merger) from the following sources from May 21, 2020 through fiscal year ending September 30,2020 including:

The Company received revenue from TMN’s operations from the following sources during the fiscal year ending September 30,2020 including:

The Company received revenue from MPath’s operations from insurance sales of $73,882 during the fiscal year ending September 30,2020. In addition, there was revenue from discontinued operations and minor non-recurring revenue (~$70,000)

Advertising

Marketing costs are charged to operations when incurred. Marketing expenses were $125,161 and $131,529 for the years ended September 30, 2020 and 2019, respectively.

Stock-Based Compensation

The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations for employee grants, commissions for non-employee grants, and stock appreciation rights grants, on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rate of 1.3171% in the year ended September 30, 2020 and 2019 of 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 159% and 35% to 40% in 2020 and 2019 respectively. SAR awards are new this year and are being treated as a liability award while the options are being treated as equity awards. While the fair value of the options are based on the Black Scholes assumptions included here, the SAR awards are based on assumptions at year end. Forfeitures are recorded as they occur.”

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand.

For the year ended September 30, 2020, the Company reported $3,687,480 in revenue, a net loss of $791,675, use of cash in operations of $549,491, and an accumulated deficit of $6,990,790. These operating results raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

On May 8, 2020, the Company received a PPP loan in the amount of $283,345. Additionally, on May 15, 2020, Forta received a PPP loan in the amount of $377,700. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loans will be eligible for forgiveness, which would result in an increase in capital of $661,045.

Company’s plans for expansion include attracting additional clients through marketing efforts with its current and future brokerage, investment management and insurance agent representatives, as well as increasing the TMN membership and the investment advisory activity of the members to increase assets under management and Company’s revenue. Future growth plans will include efforts to increase advisory headcount through recruiting of individuals advisors and groups of advisors. There is no guaranty that the Company will achieve these objectives.

Litigation

From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of its business or otherwise. It is management’s opinion that there are no legal proceedings the outcome of which will be material to its ability to operate or market its services, its consolidated financial position, operating results or cash flows.

Future Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses, which amends how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, which applies to trade accounts receivable and the calculation of the allowance for uncollectible accounts receivable. The new standard will become effective for the Company for fiscal years beginning after December 31, 2019, with early adoption permitted. In November of 2019, the FASB issued ASU 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which deferred the effective date of ASU Topic No. 2016-13 to fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements. Since the Company currently uses an expected loss from customers method, the Company does not anticipate the adoption of ASU 2016-13 will have a material impact on the Company's financial condition or results of operations.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new guidance is effective for the Company beginning October 1, 2020. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on the Company's financial condition or results of operations.

Depreciation expense was $42,419 and $37,647 during the years ended September 30, 2020 and 2019, respectively.

3. INTELLECTUAL PROPERTY

Intellectual property consists of the following:

4. 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 $54,112 and $63,919 for the years ended September 30, 2020 and 2019, respectively.

5. NOTES PAYABLE

On April 19, 2019, the Company entered into an unsecured 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, however the abatement was denied. The outstanding balance on September 30, 2020 and 2019, was $23,534 and $29,401 respectively.

On August 31, 2020, the Company entered into an agreement with John DuPriest (DuPriest), a former officer of Forta, in settlement pursuant to employment termination. The parties entered into an unsecured promissory note to DuPriest in the amount of $52,000.00, bearing interest of 5%, payable over 26 months beginning with January 15, 2021 through February 15, 2023.

On May 8, 2020, the Company received a Paycheck Protection Program (“PPP”) loan in the amount of $283,345. Additionally, on May 15, 2020, Forta received a PPP loan in the amount of $377,700. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral.

The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loans will be eligible for forgiveness, which would result in an increase in capital of $661,045. Forta submitted its forgiveness application to the SBA in December of 2020, and Company is awaiting the SBA’s follow-up on its application for forgiveness.

The Company’s maturities of debt subsequent to September 30, 2020 are as follows:

7. INCOME TAXES

The Company elected C Corporation tax status from inception. Net operating losses (“NOL”) since that date total $6,259,594 as of September 30, 2020 and may be carried forward to offset future taxable income; accordingly, no current provision for income tax has been recorded in the accompanying statements of operations. NOL carry-forward benefits begin to expire in 2035.

The following table summarizes the difference between the actual tax provision and the amounts obtained by applying the statutory tax rates to the income or loss before income taxes for the years ended September 30:

A deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit in the accompanying consolidated statements of operations are the result of changes in the assets and liabilities for deferred taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount for any tax benefits that, based on available evidence, are not expected to be realized. Income tax expense is the current tax payable or refundable for the year plus or minus the net change in the deferred tax assets and liabilities. Deferred income taxes of the Company arise from the temporary differences between financial statement and income tax recognition of NOL carry-forwards.

The deferred tax assets and liabilities in the accompanying consolidated balance sheets include the following components at September 30:

8. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

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 their office space through an operating lease in Denver Colorado, which would have expired at May 31, 2021, but has been restructures (see Subsequent Events) and non-material offices leases in Cincinnati, Ohio and Loveland, Colorado. Company’s 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.

The Company terminated its lease in Allen Texas with the consent of the landlord. The termination agreement including a contingent stock issuance, but the landlord did not claim that the contingency conditions were met, and no stock had to be issued.

The Company also leases certain equipment under operating leases.

Total rent expense for the year ended September 30, 2020 was $117,344 for Forta’s the Denver Lease (Greenwood Village – the lease ends in May 2021) from June through September 30, 2020, and Forta had small spaces in Loveland and Colorado Springs during 2020. In 2019, rent expense for Financial Gravity was $135,041. Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rental expense and rental payments is recorded as deferred rent within accrued expenses in the accompanying consolidated balance sheets. Management expects that in the normal course of business, leases will be renewed or replaced by other leases.

Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows (however, the Leases have been restructured – see Subsequent Events):

Legal Proceedings

From time to time, we are a party to or are otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. Management does not believe that there are any current, material legal proceedings ongoing at this time.

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.

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. Financial Gravity Holdings was dissolved February 13, 2019.

For each of the Company and Financial Gravity Holdings, its subsidiary, there were no preferred shares issued or outstanding as of September 30, 2020 and 2019.

Warrants

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.

Additional Common Stock Issuances

During the years ended September 30, 2020 382,932 shares were issued for services rendered, 75,757 in a private placement, 116,375 shares in stock option exercises, for $75,182 and 5,598,133 shares were issued in 2019 in exchange for debt, for $1,007,664. 41,607,315 have been issued in the Forta merger to Forta Shareholders.

10. STOCK OPTION PLAN

Effective February 27, 2015, the Company established the 2015 Stock Option Plan (the “2015 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. The maximum number of shares of stock that may be issued and exercised under the Plan is 9,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. The last date any options were granted under the 2015 Plan was March 14, 2016.

Effective November 22, 2016, the Company established the 2016 Stock Option Plan (the “2016 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. The maximum number of shares of stock that may be issued and exercised under the Plan is 20,000,000 and the maximum term of an award is 10 years. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. The first date any options were granted under the 2016 Plan was December 19, 2016.

Stock option activity is summarized as follows: