FGCO Financial Gravity Companies Inc (PK)

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

(1) Earnings per share amount is rounded up to $(0.01)

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

Financial Gravity Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF BUSINESS

Financial Gravity Companies, Inc. is a parent company of financial services companies including brokerage, investment advisor, asset management, estate planning, family office services, business and personal tax planning, business consulting, and financial advisor services. Financial Gravity's mission is to bring together financial services companies that create comprehensive customer service synergies for the clients that we serve.

Financial Gravity Companies, Inc., and subsidiaries (the “Company”) is headquartered in Austin Texas, with locations in Allen, Texas, Denver, Colorado and Cincinnati, Ohio. The currently operating wholly owned subsidiaries of the organization include:

Sofos Investments, Inc. (“Sofos”, formerly, Financial Gravity Wealth, Inc.). Sofos is a registered investment advisor (“RIA”), registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses, including money management, financial planning, and wealth management.

Tax Master Network, LLC, runs the Tax Master Network® (“TMN”) that provides four primary services including monthly subscriptions to the TMN systems, coaching and marketing services. TMN currently supports over 300 Certified Public Accountants (“CPA”) and Enrolled Agent professionals, training them to support clients through tax planning services. TMN has developed the Certified Tax Master® that includes client acquisition and retention systems. TMN also offers tax planning services through the Tax Blueprint®, which includes an extensive individualized review and assessment of the client’s tax situation. The initial assessment sets the requirements for a custom Tax Blueprint® for each client to use as guide to implementation of the identified tax savings strategies. Finally, TMN offers the Tax Operating System, which is a system for integrating and executing tax planning strategies.

MPath Advisor Resources, LLC (formerly Financial Gravity Business, LLC.) (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.

Forta Financial Group, Inc. (“Forta”) is a broker-dealer, a registered investment advisor, and a licensed insurance agent. It primarily operates in Colorado and has independent advisors and representative in other states.

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, which excludes discontinued operations of Financial Gravity Tax that are shown in the report.

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.

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 $7,600,415 was based upon the share price of Company’s stock as of May 21, 2020. 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 $7,358,050. 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, 2019 and the historical unaudited financial statements for the nine months ended June 30, 2020 – Company will be fling its 8K/A with the financial information.

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Forta’s results of operations have been included in the following financial statement for the nine months ending June 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:

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.

Effective May 21, 2020, Company acquired 100% of Forta in exchange for 45,785,879 shares of common stock of Company. Forta’s assets and liabilities are included in Company’s assets and liabilities as of June 30, 2020. Forta’s results of operations have been consolidated with Company’s results beginning as of June 1, 2020.

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 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 June 30, 2020 and September 30, 2019, respectively.

In the normal course of business, the Company may extend credit to its customers, on an unsecured basis, substantially all of whom are in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.

Prepaid Expenses

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

Property and Equipment

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

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

Leases

In February 2016, the FASB issued ASU 2016-02 Leases, which changed financial reporting as it relates to leasing transactions to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. In July 2018, the FASB issued ASU No. 2018-10 Codification Improvements to Topic 842, Leases and ASU No. 2018-11 Leases (Topic 842): Targeted Improvements. In March 2019, the FASB issued ASU No. 2019-1 Codification Improvements to Topic 842, Leases. The Company adopted these ASUs on October 1, 2019 on a modified retrospective basis. The Company did not elect the hindsight practical expedient and did elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases. The initial adoption of the standard recognized right-of-use assets of $323,097 and lease liabilities of $337,454 on the Company’s statement of financial position with no impact on the Company's results of operations. The Company had no significant changes to processes or controls.

The Company leases their office space through an operating lease in Denver Colorado, which expires at May 31, 2021, 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.

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 June 30, 2020 and 2019, and the nine months ended June 30, 2020 and 2019, the Company recorded amortization expense of $16,320 and $49,138 for 2020 and $16,410 and $49,228 for 2019, respectively, on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at June 30, 2020 was $311,688 and $246,140 at September 30, 2019.

Non-compete Agreements

Non-compete agreements entered into as a part of the TMN purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed to such agreements on the date of the purchase. The non-compete agreements are being amortized on a straight-line basis over the five-year term of the non-compete clause of the agreement. During each of the three and nine months ended June 30, 2020 and 2019, the Company recorded amortization expense of $1,308 and $3,938 for 2020 and $1,315 and $3,945 for 2019, respectively on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at June 30, 2020 was $24,978 and $19,725 at September 30, 2019.

Intellectual Property

Intellectual property is stated at cost. Intellectual property with indefinite lives are not amortized but are tested for impairment at least annually. Management has determined that the intellectual property have an indefinite life and do not consider the value of intellectual property recorded in the accompanying consolidated balance sheets to be impaired as of June 30, 2020 and September 30, 2019.

Goodwill

Goodwill represents the excess of the value of the purchase price and related costs over the identifiable assets from business acquisitions. The Company conducts an annual impairment assessment, at the reporting unit level, of its recorded goodwill. The Company assesses qualitative pertinent factors 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 June 30, 2020 and September 30, 2019. Goodwill related to the acquisition of Forta was recognized in the amount of $7,358,050, being the difference between the value of Forta’s net assets and the market value of Company’s stock at the time of the acquisition of Forta.

Income Taxes

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

The Company accounts for all uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 – Income Taxes (“ASC 740”). ASC 740 provides guidance on de-recognition, classification, interest and penalties and disclosure related to uncertain income tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no accrued interest, penalties or uncertain tax positions as of June 30, 2020 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 loss per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the reporting period. The average number of common shares for the three months ended June 30, 2020 and 2019 respectively were 72,018,838 and 38,993,226. The average number of common shares for the nine months ended June 30, 2020 and 2019, respectively, were 51,669,659 and 36,949,650. For the three and nine months ended June 30, 2020, 1,351,323 approximately common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. For the three and nine months ended June 30, 2019, approximately 3,430,646 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive.

Revenue Recognition

The Company derives its revenues primarily from: investment management fees, brokerage commissions, TMN subscriptions, financial advisor subscriptions, Tax BluePrint sales, insurance sales and marketing programs, and Tax Operating System subscriptions.

Company generates investment management fees by providing management services for client investments (through Sofos and Forta). Investment management fees are calculated as a percentage of assets under management for the period. Investment management fees Revenue is recognized as earned, at the end of each month that management services were performed. Fees are withdrawn from investor accounts monthly, in arrears, or in the case of Forta, investment management fees may be withdrawn quarterly in advance from investor accounts. These advance payments are recognized, equally, over the three months of the applicable quarter.

Company generates brokerage commissions through Forta by providing brokerage services to clients. Commissions are calculated based upon the value of the securities that are bought or sold for the client. Fees are paid as part of the purchase and sale transaction. Depending upon the securities bought or sold, recognition is either on the trade date or the date when the purchase contract is accepted.

Revenue is also derived from the sale of annuities and premiums on life insurance policies issued by insurance companies to clients (through Forta), and from insurance marketing programs (through MPath Advisor Resources, LLC.). The revenue is recognized after the insurance policies are issued and in force.

Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as Contract Liabilities in the accompanying consolidated balance sheets.

TMN provides several levels of subscription services that are charged and collected on a month to month basis. The client subscribers are tax advisors that provide tax advice to their customers. None of these services comes with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Subscription income is billed to client credit cards monthly, on the monthly anniversary of client sign-up. Cancellations are processed within the month requested and subscriptions are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are customized tax plans to save clients’ customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings, up to $10,000. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Tax Blueprint® sales are billed to the client after a preliminary assessment and client approval to move forward.

Advertising and Marketing

Advertising and marketing costs are charged to operations when incurred.

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 0.59% in the quarter ended June 30, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 7 years and volatility of 100% in 2020 and volatility of 35% to 40% in 2019.

Use of Estimates

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

Adjustments

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended September 30, 2019, included in its Annual Report on Form 10-K/A.

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 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.

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 will terminate (i) when GHS Investments has purchased an aggregate of $11,000,000 of the common stock of the Company, or (ii) 36 months after the effective date of the Agreement, or (iii) at such time that the registration statement is no longer in effect. Company has not had to use this as a source of funding and expects it to expire with no impact on the Company’s operations.

Management, in the ordinary course of business, will pursue raising additional capital through sales of common stock as well as seeking financing via equity or debt, or both from third parties. There are no assurances that additional financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead expenditures. The failure to adequately fund its capital requirements could have a material adverse effect on the Company’s business, financial condition, and results of operations. Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s stockholders and incurring additional indebtedness could involve an increased debt service cash obligation, the imposition of covenants that restrict the Company’s operations or the Company’s ability to perform on its current debt service requirements.

The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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.

* The value of the assets has not been finalized and may be adjusted based upon purchase price allocations.

Depreciation expense was $21,009 and $9,967 during the three months ended June 30, 2020 and June 30, 2019, respectively, and $33,367 and $27,943 during the nine months ended June 30, 2020 and June 30, 2019, respectively.

The Company has traditionally conducted some of its operations from leased premises.

On June 16, 2020, the Company entered into a lease termination agreement with its landlord on the premises located in Allen, Texas. The landlord accepted termination of the lease, and Company’s remaining obligation is limited to issuing shares of its common stock if the landlord’s efforts to re-lease the premises results in a loss, but not to exceed $66,000. The Company leases premises in Denver Colorado. The Denver ends on May 31, 2021, and Company will be leasing other space at the end of the term. The remaining lease obligations is $349,473. In addition, the Company has small locations in Allen, Texas, Austin, Texas and Cincinnati, Ohio.

The undiscounted annual future minimum lease payments consist of the following at:

The Company has a revolving line of credit with Wells Fargo Bank, N.A. in the amount of $67,500. Amounts drawn under this line of credit are due on demand, and monthly interest and principal payments are required. The interest rate on the line of credit is 9.5%. This line of credit is supported by the personal guarantee of John Pollock. Line of credit balance was $58,985 and $67,005 at June 30, 2020 and September 30, 2019, respectively.

On April 19, 2019, the Company entered into a Promissory Note Payable with Charles O’Banon (“O’Banon”), a customer, in the amount of $32,205. The note is in settlement of tax penalties and interest he incurred, that were proximately caused by the Company’s actions. The monthly principal and interest payments are $623, with a balloon payment of $14,048 in April 2022. The note is being repaid over 36 months and bears an interest rate of 6%. The outstanding balance on June 30, 2020 and September 30, 2019 was $26,511, and $29,401 respectively.

The Company entered into and received a Paycheck Protection Program (“PPP”) loan in the amount of $283,345 on May 8, 2020. 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.

On April 12, 2019, the Company entered into a loan agreement with John Pollock, Executive Vice President of the Company. The note bears interest at 2.76% and is due on December 1, 2020. See Related Party Transactions.

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

Accrued expenses increased by $230,699 for the nine months ending June 30, 2020, to $358,994 from $128,295 as of September 30, 2019, due to inclusion of Forta’s advisor commission accruals ($86,879) that are paid with payroll on the 15^th of the following month, taxes ($25,072), accrued vacation pay ($42,808), stock appreciation rights liability ($41,703), and credit card balances ($17,555).

For the three and nine months ended June 30, 2020 and 2019, the effective tax rate of 0% varies from the U.S. federal statutory rate primarily due to state income taxes, net losses, certain nondeductible expenses, changes in the federal statutory rate are from 35% to 21%, and an increase in the valuation allowance associated with the net operating loss carryforwards. Our deferred tax assets related to net operating loss carryforwards remain fully reserved due to uncertainty of utilization of those assets.

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

The deferred tax assets and liabilities in the accompanying consolidated balance sheets include the following components at June 30, 2020 and September 30, 2019:

Legal Proceedings

From time to time, we are a party to or are otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. Management believes the legal proceedings that the Company is involved in are immaterial to our ability to operate or market our services, our consolidated financial position, results of operations or cash flows.

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 nine months ended June 30, 2020 and 2019, the Company sold 75,757 shares and 0 shares, respectively, for $25,000 and $0, respectively.

Effective February 27, 2015, the Company established the 2015 Stock Option Plan (the “Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. The maximum number of shares of stock that may be issued pursuant to the exercise of options under the Plan is 9,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after February 27, 2018.

Effective November 22, 2016, the Company established the 2016 Stock Option Plan (the “2016 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options and stock appreciation rights (SARs). The maximum number of shares of stock that may be issued pursuant to the exercise of options under the 2016 Plan is 20,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after ten years from the date of adoption of the 2016 Plan.

Stock option and stock appreciation rights activity is summarized as follows:

Unamortized share-based compensation expense as of June 30, 2020 amounted to $424,496 which is expected to be recognized over the next 4.6685 years. 

Total compensation expense, included in salaries and wages, of previously unamortized stock compensation was $50,885 and $41,370 for the three ended June 30, 2020 and 2019, respectively, and $67,136 and $133,714 for the nine months ended June 30, 2020 and 2019, respectively.

On November 27, 2019, the 2016 Plan was amended to allow grants of other equity related rights, including Stock Appreciation Rights. During the three and nine months ended June 30, 2020, 500,000 and 5,350,000 options and SARs were granted, respectively. SARs are recorded as a liability because there is a cash settlement option.

On May 21, 2020, the Company completed the purchase of 100% of the stock of Forta. As a result, Scott Winters, William Nelson, Jr., and Gary Nemer (a former board member) now own, in aggregate, in excess of 39% of the shares of stock of Company.

As a result of the acquisition of the TMN business in 2016, the Company is obligated to make payments to TaxTuneup, LLC, which is an entity owned by Edward A. Lyon (a current board member), each month totaling $16,500. The total paid under these agreements in the three months ended June 30, 2020 and 2019 respectively, were $49,500 and $49,500, and for the nine months ended June 30, 2020 and 2019 were $148,500 and $148,500.

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 June 30, 2020 was $5,116 and at September 30, 2019 was $7,526.

On February 28, 2020 and March 5, 2020, the Board of Directions approved employment agreements that included employee stock options and stock appreciation rights to employees that are also Board members and related parties totaling 3,450,000 in grants.

On July 20, 2020, the Company issued to Gary Nemer 250,000 in employee stock options vesting over a three-year period and 500,000 in stock appreciation rights vesting over five years

On August 14, 2020, one of the advisors at Forta in Denver resigned to join a smaller firm. The departure will affect future headcount and revenue in the Denver office.

A total of 4,670,352 shares that will be issued to Forta shareholders have not yet been issued due to lack of shareholder paperwork. When issue, the total issued shares will be 87,693,400.