Financial Gravity Companies, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand its historical results of operations during the periods presented and its financial condition. This MD&A should be read in conjunction with its financial statements and the accompanying notes and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause its actual results to differ materially from management’s expectations. See the sections entitled “Forward-Looking Statements” and “Risk Factors” included in this Form 10-Q for the nine months ended June 30, 2021. Plan of Operations Financial Gravity is a parent company of financial services companies including brokerage, financial advisor services and wealth management, insurance, estate planning, family office services, risk management, business and personal tax planning, and business consulting. Financial Gravity's mission is to bring together companies and services that will deliver a complete financial services experience to our clients. Financial Gravity’s Subsidiaries: Forta Financial Group, Inc. Forta is a securities broker dealer, a registered investment advisor and a licensed insurance agency. Forta is a registered investment advisor with the Securities and Exchange Commission (''SEC") and with a registered broker-dealer with the Financial Industry Regulatory Authority ("FINRA"). Forta 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, Forta 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 June 30, 2021, the Forta’s net capital was $220,583 and the aggregate indebtedness to net capital was 114.29%. 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. Sofos Investments, Inc. Sofos is a Registered Investment Advisory firm. Sofos manages investment portfolios and is a registered investment advisor engaged in financial planning and wealth management and is registered either with the Securities and Exchange Commission “SEC” or state securities authorities. MPath Advisor Resources, LLC (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies. Tax Master Network, LLC Tax Master Network (“TMN”) supports over 300 CPAs and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. Company believes that TMN customer base adds significant business development opportunities in the investment advisory area. The Company developed the Certified Tax Master® for this group and rolled out new client systems and client acquisition systems. TMN also provides tax services through its “Tax Blueprint®” system which identifies several strategies for lowering the client's taxes. 25 Results of Operations for the three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020 Revenues For the nine months ended June 30, 2021, revenue increased $2,816,752 to $5,066,332 from $2,249,580 for the nine months ended June 30, 2020. The principal components of the increase in revenue are: revenue of approximately $1,900,000 from Forta, increased investment management revenue from Sofos of approximately $458,000, and increased revenue from TMN of approximately 190,000, and from Mpath of approximately $365,000, offset by decreased revenue at Financial Gravity Tax of approximately $70,000 as compared to the nine months ended June 30, 2020. For the three months ended June 30, 2021, revenue increased $735,835 to $1,676,659 from $947,491 for the three months Ended June 30, 2020. The principal components of the increase in revenue are: revenue of approximately $400,000 from Forta, increased investment management revenue from Sofos of approximately $321,000, and increased revenue from TMN of approximately 11,000, and from Mpath of approximately $38,000. Operating Expenses Cost of services activity increased $11,507 to $29,166 for the three months ended June 30, 2021 from $17,659 for the three months ended June 30, 2020. The three month increase consists of an increase in Forta clearing house charges of $7,000, and an increase in TMN credit card processing charges of approximately $4,000, due to increased membership. Cost of services activity increased $42,613 to $87,396 for the nine months ended June 30, 2021 from $44,317 for the nine months Ended June 30, 2020. The nine month increase is principally due to an increase in Forta clearing house charges of approximately $34,000 and a Sofos customer settlement of $11,073. The cost of services is credit card processing fees and Forta cost of brokerage services. Professional services expenses include legal expenses , professional fees, and business consulting. Professional services expenses increased $61,396 to $123,077 for the three months ended June 30, 2021 from $61,681 for the three months ended June 30, 2020 This increase is primarily due to an increase in legal fees and accounting arising from Forta operations. Professional services expenses increased $118,000 to $352,881 for the nine months ended June 30, 2021 from $243,881 for the nine months Ended June 30, 2020 This increase is primarily due to an increase in legal fees and accounting arising from Forta operations. Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $17,042 to $21,594 for the three months ended June 30, 2021 from $38,636 for the three months ended June 30, 2020. The decrease is due to a significant number of assets becoming fully depreciated. Depreciation and amortization expenses increased $2,655 to $89,098 for the nine months ended June 30, 2021 from $86,443 for the nine months Ended June 30, 2020. General and administrative expenses increased $175,677 to $342,023 for the three months ended June 30, 2021 from $168,084 for the three months ended June 30, 2020. The increase is primarily due to a final rent settlement on the termination of the Allen lease, of $66,000, and increase of Forta's expenses of approximately $108,000 for the period, and an increase in TMN G&A of $17,000. General and administrative expenses increased $548,280 to $896,438 for the nine months ended June 30, 2021 from $348,158 for the nine months Ended June 30, 2020. The drivers of the increase are the same categories as in the three month increases. Marketing expenses decreased by $33,166 to $23,249 for the three months ended June 30, 2021 from $56,865 for the three months ended June 30, 2020 Marketing expenses decreased by $34,970 to $56,029 for the nine months ended June 30, 2021 from $90,999 for the nine months Ended June 30, 2020. The decreases are due to the Company shutting down some previous marketing channels, while new channels have yet to be identified and implemented. Compensation expenses increased $643,033 to $1,510,363 for the three months ended June 30, 2021 from $867,330 for the three months ended June 30, 2020. The three month increase is principally due to an increase in commissions of approximately $350,000, an increase in FGC compensation of approximately $55,000 and an increase in Forta non-commission compensation of approximately, $205,000. Compensation expenses increased $2,231,416 to $4,271,396 for the nine months ended June 30, 2021 from $2,014,413 for the nine months Ended June 30, 2020. The increase is principally comprised of an increase in commissions, $1,240,000, increased Forta non-commission compensation, $740,000, and an increase in FGC compensation $150,000. 26 The Company experienced an increase in its net loss of $6,845,684 to a net loss of $7,111,843 for the three months ended June 30, 2021 from a net loss of $266,159 for the three months ended June 30, 2020. The Company experienced an increase in its net loss of $6,968,728 to a net loss of $7,406,240 for the nine months ended June 30, 2021 from a net loss of $437,512 for the nine months Ended June 30, 2020. The changes are primarily attributable to loan forgiveness on PPP loans, in combination with the reasons noted above. Significant Accounting Policies Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements. Use of Estimates and Assumptions. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition and Accounts Receivable. The Company derives its revenues primarily from six components: Investment Management Fees, Brokerage Commissions, Tax Master Network subscriptions, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales. Sofos Investments, Inc. generates investment management fees for services provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage client investments. Investment management fees are calculated as a percentage of assets under management for the period. Investment management fees are Revenue is recognized as earned, at the end of each period. Fees are withdrawn from investor assets monthly, in arrears. Commission revenue is derived from the sale of securities, annuities and premiums on life insurance policies. The revenue is recognized when commissions are earned from the sale of securities, and when it is determined that insurance products are sold. Commissions are received after products are sold, issued or in force. Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets. Tax Master Network has five levels of services that are charged and collected on a month-to-month subscription basis. None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are tax planning strategies guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up. Tax BluePrint sales are billed to the client after a preliminary assessment and client approval to move forward. Revenue has been recognized in 2021 in the amount of $76,470, that was included in the contract liability at the beginning of the at the end of 2020. 27 Services income is recognized as consulting and other professional services are performed by the Company. Income is recognized as services are delivered. Commission revenue is derived from the sale of premiums on life insurance policies held by third parties. The revenue is recognized as received from the insurer, issuer. Revenue represents gross billings less discounts, net of sales tax, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets. 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. 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%, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40% in 2020 and is based on risk-free rate of 0.834%, dividend yield of 0%, expected life of 10 years and volatility of 87.68% in 2021. SAR awards 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 period end and are treated as liability awards. Forfeitures are recorded as they occur. Liquidity and Capital Resources As of June 30, 2021, the Company had cash and cash equivalents of $435,040. The decrease of $194,282 in cash and cash equivalents from September 30, 2020 was due to net cash provided by operating activities of $98,019 net cash used in investing activities of $3,540, and net cash used in operations of $412,807. As shown below, at June 30, 2021, our contractual cash obligations totaled approximately $799,227, all of which consisted of debt principal and lease obligations. Maturities by years Contractual obligations Less than 1 year 1-3 years Total Notes payable $ 254,238 $ 228,053 $ 482,291 Lease liability 83,432 170,044 253,476 Line of Credit 38,830 – 38,830 Total contractual cash obligations $ 385,417 $ 413,811 $ 799,227 28 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 nine months ended June 30, 2021, the Company reported $5,066,332 in revenue, a net loss of $7,406,240, net cash used in operations of $412,807, and an accumulated deficit of $14,397,029. 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. In in February of 2021, Forta received a PPP loan of $422,900. The loan 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 loan will be eligible for forgiveness, which would result in an increase in capital of $422,900. 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. Off Balance Sheet Transactions and Related Matters Other than operating leases discussed in Note 7 to the consolidated financial statements, there are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk. Our business is leveraged and, accordingly, is sensitive to fluctuations in interest rates. Any significant increase in interest rates could have a material adverse effect on our financial condition and ability to continue as a going concern.