Financial Gravity Companies, Inc. 10-K

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES. Market Information The Company’s Common Stock is currently traded in the over-the-counter market and quoted under the symbol FGCO. The following are the high and low sales prices for the Company’s Common Stock for the periods reflected below: Fiscal Year Ended September 30, 2019 High Low First Quarter $ 0.1 $ 0.07 Second Quarter $ 0.54 $ 0.08 Third Quarter $ 0.4 $ 0.17 Fourth Quarter $ 0.51 $ 0.18 Fiscal Year Ended September 30, 2020 High Low First Quarter $ 0.44 $ 0.20 Second Quarter $ 0.90 $ 0.05 Third Quarter $ 0.44 $ 0.11 Fourth Quarter $ 0.29 $ 0.12 The above prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. Holders The approximate number of stockholders of record of the Company’s Common Stock on September 30, 2020 was 85. Dividends The Company has never paid any cash dividends on its common stock, and it is anticipated that none will be paid in the foreseeable future. Recent Sales/Issuance of Unregistered Securities During the year ended September 30, 2020 an aggregate of 75,757 shares of the Company’s common stock have been sold for $25,000, 116,375 shares in stock options were exercised for $182 and 382,931 shares were issued for $50,000 in services rendered to the Company; in 2019, 5,598,133 shares were issued in exchange for $1,007,664 in debt. As a result of the merger with Forta, 41,607,315 shares of stock have been issued to Forta shareholders as of September 30, 2020, with a total of 4,178,564 that remain unissued. 7 The sales of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, the Company believes that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. Each investor represented that such investor either (A) is an “accredited investor,” (B) has such knowledge and experience in financial and business matters that the investor is capable of evaluating the merits and risks of acquiring the shares of the Company’s common stock, or (C) appointed an appropriate person to act as the investor’s purchaser representative in connection with evaluating the merits and risks of acquiring the shares of the Company’s common stock. The investors received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. The Company’s option grants were effected pursuant to Rule 701 promulgated under the Securities Act. Repurchases of Equity Securities The Company did not repurchase any of its equity securities during the years ended September 30, 2020 or 2019. Item 6. SELECTED FINANCIAL DATA. Not applicable. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand its historical results of operations during the periods presented and its financial condition. This MD&A should be read in conjunction with its financial statements and the accompanying notes and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause its actual results to differ materially from management’s expectations. See the sections entitled “Forward-Looking Statements” and “Risk Factors” above. Plan of Operations Financial Gravity Companies, Inc. (“Financial Gravity”, “We” or the “Company”), based in Austin, Texas, was formed specifically to be the parent company of several subsidiaries that provide integrated tax, investment, business, and financial solutions. Financial Gravity’s clients include small businesses, small business owners and high and middle net worth individuals. The Company’s services are focused on helping clients build wealth, most often with investment advice, tax savings, lowering costs and improving efficiency. In addition to expanding through client procurement and organic growth, Financial Gravity intends to pursue acquisitions. The primary acquisition targets currently include individuals and groups that provide investment and financial advice. The Company is actively identifying potential acquisition candidates to fuel more rapid growth. Financial Gravity’s Subsidiaries and Reportable Segments: The following outline briefly describes Financial Gravity’s active subsidiaries and the products and services they offer: Sofos Investments, 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 financial planning, wealth management and money management. Sofos commenced its money management services in late 2019, and by September 2020 was approaching $100,000,000 in assets under management. 8 Tax Master Network, LLC (“TMN”) through the Tax Master Network® provides monthly subscriptions services to the TMN systems, coaching and marketing services to over 300 Certified Public Accountants (“CPA”) and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. TMN’s tax planning services include the Tax Blueprint®, Certified Tax Master®, and the Tax Operating System. In addition, TMN will be launching new efforts to increase subscribers, including a revamped tax operating system and financial advisor business development programs that will assist TMN subscribers in increasing their business activity. The goal is to provide TMN subscribers with a platform for them to enhance their business opportunities in the areas of investment and financial advice and to increase their effectiveness as tax advisors to small businesses and individuals. MPath Advisor Resources, LLC (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies. This is a new venture that will be focused upon insurance marketing and will capture business synergies in the sale of insurance products by financial advisors with TMN and with Forta. Forta Financial Group, Inc. (“Forta”) Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation. The goal is to have Forta focus on attracting independent advisors and to support TMN members as they grow their financial advisory businesses. Forta is implementing plans to recruit independent advisors. Growth comes from the following reportable segments: Tax services and financial advisory services, including Tax Blueprint® and Tax Operating System® services through TMN, as well as investment advisory services by TMN subscribers to their clients. Brokerage and wealth management services through Forta and money management and investment advisory services through Sofos. Other products and services include insurance and other miscellaneous products and services. Future growth is expected to come from these key areas, organic growth, acquisitions, and strategic alliances. Business Acquisition and Disposition The Company acquired Forta in 2020 in exchange for stock. 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, 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. The Company disposed of its tax unit. The tax unit has 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. Revenues For the year ended September 30, 2020, revenue decreased $387,568 to $3,687480 from $4,075,048 for the year ended September 30, 2019. The principal drivers for this are a decrease in revenue from the discontinued tax operations of $649,830 and reduced revenue from reduction of the number of advisors at Sofos of $1,112,944, as well as some minor non-recurring revenue at Financial Gravity, offset by an increase in revenue from Forta of $1,270,339, an increase in revenue from TMN of $35,844, an increase of revenue from MPath of $73,882. The combined revenue for the Company includes only the revenue from Forta since May 21, 2020. Forta generated in excess of $2 million of revenue from October 1, 2019 through May 20, 2020 (the day prior to the acquisition of Forta). On a twelve-month pro forma basis that included Forta’s revenue, the Company would have generated in excess of $6,000,000 in revenue, or approximately $2,000,000 in annualized increased revenue. 9 Operating Expenses Cost of services increased by $18,144 to $73,071 for the year ended September 30, 2020 from $54,927 for the year ended September 30, 2019, primarily due increased costs at Forta of $33,784, offset by decreases at Financial Gravity ($5,946), discontinued tax operations ($21,355), and increase at TMN of $8,891. Professional services expenses include consulting fees, legal expense, professional fees, and business consulting. Professional services expenses increased $233,528 to $375,263 for the year ended September 30, 2020 from $141,835 for the year ended September 30, 2019. The increase included professional fees at Forta of $93,095, an increase in professional fees at Financial Gravity of $321,761 (including adjustments in 2019 for accrual of expenses that were greater than the fees incurred), offset by decreases in professional fees at Sofos of $73,793, at TMN of $69,516, and at the discontinued tax practice of $43,526. Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $22,282 to $166,586 for the year ended September 30, 2020 from $189,070 for the year ended September 30, 2019. The decrease is primarily due to an increase of expense at Financial Gravity of $152,173 (including the full impairment of Trademarks ($69,000), offset by a decrease at TMN of $159,602, a small decrease at Sofos of $4,165, and a decrease at the discontinued tax practice of $10,953. General and administrative expenses increased $138,979 to $672,784 for the year ended September 30, 2020 from $533,805 for the year ended September 30, 2019. The increase is primarily due increased costs at Forta of $275,272, and Financial Gravity, offset by decreases at other subsidiaries including the discontinued tax department operations ($163,452), Sofos reductions due to fewer advisors and at TMN aggregating approximately ($250,000). Marketing expenses decreased $6,368 to $125,161 for the year ended September 30, 2020 from $131,529 for the year ended September 30, 2019. The decrease is primarily due to a reduction of costs at the discontinued tax operations of ($22,788), and reductions in outside vendors by bringing marketing efforts in-house at TMN ($76,678) and Sofos ($15,838), offset by an increase in marketing expenses at Forta of $20,568, at Financial Gravity $85,110, and at MPath $3300. The variance in expenses also reflects a change in marketing efforts influenced by Covid 19 restrictions that shut down some previous marketing channels and a move toward the independent advisor model at Forta where advisors cover their own marketing expenses. Compensation expenses decreased $315,438 to $3,186,305 for the year ended September 30, 2020 from $3,501,744 for the year ended September 30, 2019. The decrease is primarily due to an increase in executive compensation at Financial Gravity of $1,580,121, the increase of compensation at Forta of $808,670 that includes commissions, and a small increase at MPath, offset by a decrease in compensation at the discontinued tax operations of $1,023,467, Sofos of $917,359 that includes reduction in commissions, at TMN of $703,375 related to reduction in employees and outsourced services and a move toward the independent advisor model at Forta where advisors cover their own marketing expenses. The Company experienced an increase in net loss of $168,190 to a net loss of $791,675 for the year ended September 30, 2020 from a net loss of $623,485 for the year ended September 30, 2019, primarily attributable to the reasons noted above. The variance in loss for the period also reflects the impact of Covid-19 related reduction in marketing and face to face sales, which impacted revenues. This was offset by the sale of the tax unit for $150,000. 10 Significant Accounting Policies Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements. Use of Estimates and Assumptions. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition and Accounts Receivable. Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments. Fees are generally paid quarterly, five days before each quarter-end or monthly in arrears. Revenues are recognized in the period earned. The Company earns commission when it buys and sells securities and various insurance products on behalf of its customers. Each time a customer enters into a buy or sell transaction, the Company charges a commission. Commissions and related clearing expenses are recorded on the trade date (the date that the Company fills the trade order by finding and contracting with a counterparty and confirms the trade with the customer), and commission revenue from the sale of premiums on life insurance policies is recognized as received from the insurer, issuer. The Company generates services income which is recognized as consulting and other professional services are performed by the Company. Income is recognized as services are delivered. 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. 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. 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 $1,255,457 for the fiscal year after elimination of intercompany accounts. 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: Investment Advisory fees $ 757,290 Commission-based transactions 436,024 Insurance and Other Service Revenue 77,024 Total Revenue $ 1,270,339 11 TMN has 3 types of services that are charged and collected on a month-to-month subscription basis (TMN 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. The Company received revenue from TMN’s operations from the following sources during the fiscal year ending September 30,2020 including: TMN membership subscriptions: $ 733,838 Tax Blueprints: 224,000 Commissions/Referrals: 61,889 Miscellaneous: (1,715 ) Total: $ 1,018,012 The Company received revenue from MPath’s operations from insurance sales of $73,882 during the fiscal year ending September 30,2020. The total of all revenue also includes approximately $70,000 from discontinued operations and minor non-recurring revenue. 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 1.32% in the year ended September 30, 2020 and 1.50% to 2.89% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 159% in 2020 and volatility of 25% to 34.05% in 2019. Liquidity and Capital Resources As of September 30, 2020, the Company had cash and cash equivalents of $482,854, as compared $36,053 as of September 30, 2019. The increase of $446,801 in cash and cash equivalents from September 30, 2019 was due to net cash provided financing from Paycheck Protection Program (“PPP”) through loans to Financial Gravity of $283,345, and other sources of cash as per the Financial Gravity’s Statement of Cash Flows, including approximately $700,000 in cash at Forta at the May 21, 2020 merger date. As shown below, at September 30, 2020, Financial Gravity’s contractual cash obligations totaled approximately $970,741 all of which consisted of operating lease obligations and debt principal. Payments due by period Contractual obligations Less than 1 year 1-3 years 4-5 years Total Notes payable $ 354,119 $ 382,460 $ 0 $ 736,579 Operating leases 180,050 180,050 Line of Credit 54,112 0 0 54,112 Total contractual cash obligations $ 588,281 $ 382,460 $ 0 $ 970,741 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. 12 Off Balance Sheet Transactions and Related Matters 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risk. The Company’s business is leveraged and, accordingly, is sensitive to fluctuations in interest rates. Any significant increase in interest rates could have a material adverse effect on its financial condition and ability to continue as a going concern. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements required by this item are included in this report in Part IV, Item 15. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.