Financial Gravity Companies, Inc. 10-K

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. Financial Gravity’s Subsidiaries and Reportable Segments: The following outline briefly describes Financial Gravity’s active subsidiaries and the products and services they offer: 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’s tax planning services include the Tax Blueprint®, Certified Tax Master®, and the Tax Operating System. In addition, TMN has launched 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. Financial Gravity Family Office Services, LLC (“FGFOS”) is a registered investment advisor (“RIA”) that offers financial planning, and wealth management services to clients through independent investment advisors. Many of the independent investment advisors are members of TMN that are licensed to provide investment management advice. FGFOS provides support for the multi-family offices run by the TMN members. Financial Gravity Asset Management, Inc., formerly Sofos Investment Management, Inc. (“FGAM”), is an RIA, registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses. FGAM had in excess of $170,000,000 in assets under management as of September 30, 2021. Financial Gravity Enhanced Markets, LLC, formerly, MPath Advisor Resources, LLC (“FGEM”) is an insurance marketing organization and provides insurance products and services to insurance agents or agencies. The advisors with FGFOS access insurance and other related products through FGEM. Forta Financial Group, Inc. (“Forta”) is a broker-dealer, a registered investment advisor, and a licensed insurance agent. It primarily operates in Colorado. As part of its annual review of the performance of its subsidiaries, Company has decided to discontinue Forta’s broker/dealer operations, and is in the process of completing that transition. 8 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 through FGFOS. Family Office Services including wealth management services through FGFOS, investment advisory services through FGAM, and insurance services through FGEM. 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. However, management has determined that Forta should discontinue operations and Forta is being shut down. The goodwill attributed to the Forta acquisition has been written off in 2021. In March 1, 2021 Company entered into a merger agreement with NCW Group, Inc. Company issued 8,000,000 shares of its common stock in exchange for 100% ownership of the stock of NCW Group, Inc. The owners of NCW and some staff have resigned from NCW and are employees of Forta. The transaction included transfer of client accounts from NCW to Forta and Sofos. This will generate approximately $500,000 in recurring annual revenue. The value of the assets is based upon the value of the recurring revenue, which is $2,000,000 in aggregate, which is the market value of 8 million shares at the time of issuance (July 26, 2021). The purchase price is allocated to Goodwill. Revenues For the year ended September 30, 2021, revenue increased approximately $3,000,000 to $6,672,793 from $3,687480 for the year ended September 30, 2020. The principal drivers for this are an increase in revenue from Forta of approximately $1,625,000, from FGAM of approximately $680,000, from FGEM of approximately $460,000 and from TMN of approximately $150,000. However, management has determined that Forta’s broker/dealer business is no longer viable and has decided to discontinue Forta’s operations, as a result of which Forta will no longer substantially contribute to Company’s revenue. Operating Expenses Cost of services increased by $33,559 to $106,630 for the year ended September 30, 2021 from $73,071 for the year ended September 30, 2020, primarily due increased costs at Forta of approximately $22,000, and approximately $11,000 at FGAM. Professional services expenses include consulting fees, legal expense, professional fees, and business consulting increased approximately $21,000 to $396,755 for the year ended September 30, 2021 from $375,363 for the year ended September 30, 2020. The primary source of the increase was legal fees at Forta related to FINRA claims, reductions of audit and legal fees at Company of approximately $35,000, outside tax preparation fees related to TMN of approximately $40,000, and small increases in expense at the other subsidiaries. Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased approximately $55,000 to $111,052 for the year ended September 30, 2021 from $166,586 for the year ended September 30, 2020. The decrease is primarily due to an decrease of expense at Financial Gravity of approximately $86,000, offset by an increase at TMN of approximately $30,000. 9 General and administrative expenses increased approximately $470,000 to $1,141,570 for the year ended September 30, 2021 from $672,784 for the year ended September 30, 2020. The increase is primarily due increased costs at Forta of approximately $730,000 (reflected a full twelve months of operations), offset by decreases at other subsidiaries including decreases at FGAM of approximately $255,000. Marketing expenses decreased approximately $47,000 to approximately $78,000 for the year ended September 30, 2021 from $125,161 for the year ended September 30, 2020. The decrease is primarily due to a reduction of costs at Company of approximately $59,000, and net increases at the subsidiaries of approximately $12,000. The variance in expenses reflects a change in marketing efforts influenced by the move toward the independent advisor model at the subsidiaries. Compensation expenses increased approximately $2,350,000 to approximately $5,540,000 for the year ended September 30, 2021 from $3,186,305 for the year ended September 30, 2020. The increase is primarily due to an increase in executive compensation at Financial Gravity of approximately $443,000, the increase of compensation at Forta of approximately $1,627,000 that includes a full twelve months, and increases at FGEM and FGAM reflected increased commissions from higher revenue by independent advisors of approximately $260,000. The Company experienced an increase in net loss of approximately $6,630,000 to a net loss of approximately $7,423,000 for the year ended September 30, 2021 from a net loss of $791,675 for the year ended September 30, 2020, primarily attributable to a decrease in ordinary loss of approximately $208,000 for the reasons noted above, and the write-off of Goodwill of $7,380,603, offset by the income related to forgiveness of PPP loans of $661,045. 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 the policy is accepted by the insurer. 10 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 contract liabilities in the accompanying consolidated balance sheets. Accrued revenue is carried only for investment management fees that are paid in arrears. The allowance for doubtful accounts was $0 and $0 as of September 30, 2021 and 2020, 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 FGAM 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 $2,076,383 for the fiscal year ending September 30, 2021, and $1,395,877 for the fiscal year ending September 30, 2020. The Company received revenue from Forta’s operations during the fiscal year ending September 30, 2021, and from May 21, 2020 through fiscal year ending September 30, 2020 including: 2021 2020 Investment Advisory fees $ 1,774,561 $ 757,290 Commission-based transactions 963,297 436,024 Insurance and Other Service Revenue 157,206 77,024 Total Revenue $ 2,895,064 $ 1,270,339 TMN charges month-to-month subscription fees to its members. None of these subscription 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 30,2021 including: 2021 2020 TMN membership subscriptions: $ 857,699 $ 733,838 Tax Blueprints: 255,000 224,000 Commissions/Referrals: 46,462 61,889 Miscellaneous: 5,195 (1,715 ) Total: $ 1,164,356 $ 1,018,012 The Company received revenue from FGEM’s operations from insurance sales of $536,990 during the fiscal year ending September 30, 2021 from $73,882 in fiscal year 2020. 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 0.88% in the year ended September 30, 2021 and 1.32% in 2020, dividend yield of 0%, expected life of 10 years and volatility of 87.68% in 2021 and volatility of 159% in 2020. 11 Liquidity and Capital Resources As of September 30, 2021, the Company had cash and cash equivalents of $306,057, as compared $482,854 as of September 30, 2020. The decrease of $176,797 in cash and cash equivalents from September 30, 2020 was due to cash used in operations. 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. 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. Interest rate increases may create market risks. Some clients may choose to limit their exposure to the stock market and this 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.