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 six months ended March 31, 2022. Plan of Operations Financial Gravity Companies, Inc. and Subsidiaries (the “Company”) located in Lakeway Texas. Operations are conducted through wholly owned subsidiaries. Company supports investment advisors and provides tax professionals with a turnkey family office charter. Company helps the tax professionals evolve from the commoditized business of tax compliance to a Family Office Director that runs and manages their own multi-family office. Family Office Directors are able to leverage the Financial Gravity systems, technology, proprietary resources, and deep domain expertise to bring an elevated and holistic financial service experience to their clients that spans proactive tax planning, retirement and estate planning, wealth management, and risk mitigation. Financial Gravity’s Subsidiaries: Financial Gravity Asset 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 March 31, 2022. Financial Gravity Enhanced Markets, 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. Tax Master Network (“TMN”) supports over 300 CPA and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. TMN member customer base adds significant business development opportunities for Company. TMN provides tax services, including its “Tax Blueprint®” system which identifies strategies for lowering the client's taxes. This presents Company with the opportunity to provide enhanced tax advice and investment advisory services. Financial Gravity Family Office Services, LLC (“FGFOS”) is an RIA that offers financial planning, and wealth management services to clients through 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 Investment Services, LLC (“FGIS”) is an office of Office of Supervisory Jurisdiction that is affiliated with Kingswood U.S., a broker dealer. FGIS will have a small number of registered representatives for securities transactions that require a broker/dealer affiliation. Forta Financial Group, Inc. (“Forta”) has discontinued its broker/dealer and RIA operations. 21 Growth comes from the following activities: 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, insurance services through FGEM, and stock brokerage services through FGIS. Results of Operations for the three and six months ended March 31, 2022 compared to the three and six months ended March 31, 2021 Revenues For the three months ended March 31, 2022, revenue decreased approximately $107,000 to approximately $1,575,000 from approximately $1,682,000 for the three months ended March 31, 2021. The principal components of the decrease in revenue are: reduction of revenue of approximately $650,000 from winding down of Forta, an increase of revenue from FGFOS of approximately $380,000, increases in revenue for FGAM and TMN of approximately $115,000, and minor changes in other units as compared to the three months ended March 31, 2021. For the six months ended March 31, 2022, revenue decreased approximately $218,000 to approximately $3,171,000 from $3,389,673 for the six months ended March 31, 2021. The principal components of the decrease in revenue are: decrease in revenue of approximately $1,255,000 from winding down of Forta, increased investment management revenue from FGAM of approximately $140,000, and increase in revenue from FGFOS of approximately $720,000, an increase from insurance sales from FGEM of approximately $260,000, and minor changes on other operating units as compared to the six months ended March 31, 2021. Operating Expenses Cost of services activity increased approximately $252,000 to approximately $274,700 for the three months ended March 31, 2022 from $22,683 for the three months ended March 31, 2021. Cost of services activity increased approximately $235,000 to approximately $293,000 for the six months ended March 31, 2022 from $58,230 for the six months ended March 31, 2021. The three and six month increases consist primarily of Forta's custodian's termination charge of $250,000. Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses increased approximately $26,000 to approximately $123,000 for the three months ended March 31, 2022 from $97,074 for the three months ended March 31, 2021 This increase is primarily due to an increase in legal fees and accounting arising from Forta operations. Professional services expenses decreased approximately $9400 to approximately $220,000 for the six months ended March 31, 2022 from $229,804 for the six months ended March 31, 2021 This increase is primarily due to small increases in legal fees and accounting arising from FGCO and Forta operations. Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased approximately $11,000 to approximately $21,000 for the three months ended March 31, 2022 from $32,174 for the three months ended March 31, 2021. The decrease is due to deceleration of depreciation of certain assets. Depreciation and amortization expenses decreased approximately $24,000 to approximately $43,000 for the six months ended March 31, 2022 from $67,504 for the six months ended March 31, 2021. The decrease is due to deceleration of depreciation of certain assets. General and administrative expenses decreased approximately $98,000 to approximately $124,000 for the three months ended March 31, 2022 from $221,398 for the three months ended March 31, 2021. The decrease is primarily due to the wind down of Forta. General and administrative expenses decreased approximately $291,000 to approximately $267,000 for the six months ended March 31, 2022 from approximately $558,100 for the six months ended March 31, 2021. The decrease is primarily due to the winding down of Forta ($340,000 in reductions), and smaller changes in overhead at the other operating units including: (FGCO - approximately $98,000 in increases, and TMN - approximately $65,000 in decreases). 22 Marketing expenses increased approximately $29,000 to approximately $41,000 for the three months ended March 31, 2022 from $12,234 for the three months ended March 31, 2021 Marketing expenses increased by approximately $35,000 to approximately $68,000 for the six months ended March 31, 2022 from $32,780 for the six months ended March 31, 2021. The decreases are due to the Company shutting down some previous marketing channels, while new channels have yet to be identified and implemented. Compensation expense decreased approximately $91,000 to approximately $1,309,000 for the three months ended March 31, 2022 from approximately $1,400,000 for the three months ended March 31, 2021. The decrease was principally due to a decrease at Forta as it winds down ($541,457) and the increased salary and commission expense at FGCO (approximately $281,000) and FGFOS ($166,978) and other smaller amounts at the other operating units. Compensation expense decreased approximately $65,000 to approximately $2,670,000 for the six months ended March 31, 2022 from approximately $2,735,000 for the six months ended March 31, 2021. The decrease was principally due to a decrease at Forta as it winds down ($1,035,839) and the increased salary and commission expense at FGCO (approximately $581,000) and FGFOS ($351,483) and other smaller amounts at the other operating units. The Company experienced an increase in its net loss of approximately $293,000 to a net loss of approximately $397,000 for the three months ended March 31, 2022 from a net loss of approximately $104,000 for the three months ended March 31, 2021. The Company experienced an increase in its net loss of approximately $175,000 to a net loss of approximately $473,000 for the six months ended March 31, 2022 from a net loss of $298,147 for the six months ended March 31, 2021. The changes are primarily attributable to 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 the following activities: Investment Management Fees, Securities Brokerage Commissions, Tax Master Network subscriptions, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales. Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments. Fees are generally paid quarterly, in advance, for each quarter or monthly in arrears. Revenues are earned over the period in which the service is provided, which is typically monthly. The Company generates services income which is recognized when consulting and other professional services are performed by the Company (primarily from TMN and FGEM). Income is recognized as services are delivered. Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as contract liabilities in the accompanying consolidated balance sheets. 23 Accrued revenues are recorded for investment management fees that are paid in arrears. The allowance for doubtful accounts was $0 and $0 as of March 31, 2022 and September 30, 2021, 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. FGAM, FGFOS and Forta generated investment management fees for services provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage client investments. Revenue is recognized as earned, at the end of each monthly period. FGIS and Forta generated commission revenue from the sale of securities and annuities and premiums on life insurance policies. The revenue is recognized when commissions are earned, or when it is determined that annuities or insurance products are sold, which is typically at trade date. Commissions are received after products are sold, issued or in force. FGEM generates revenue from insurance marketing services for insurance agents, including sourcing of insurance policies through selling agreements. Revenue is recognized when the policies have been accepted by the issuer and it is probable the commission will be received. Tax Master Network provides network subscription services to its TMN members that are charged and collected on a month-to-month 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. A contract liability is recognized when the customer payment is received. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Trade deferred revenue is carried only for subscription revenues not received in the period they apply to. The allowance for doubtful accounts was $0 and $0 as of March 31, 2022 and September 30, 2021 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. 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 March 31, 2022, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40% in 2021. SAR awards are new this year and are being treated as a liability award while the options are being treated as equity awards. While the fair value of the options are based on the Black Scholes assumptions included here, the SAR awards are based on assumptions at period end and are treated as liability awards. Forfeitures are recorded as they occur. 24 Liquidity and Capital Resources As of March 31, 2022, the Company had cash and cash equivalents of $177,887. The net decrease in cash was approximately $128,000, primarily 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 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 six months ended March 31, 2022, the Company reported $3,171,235 in revenue, a net loss of $472,736, decrease of cash of $128,170, and an accumulated deficit of $14,886,607. These operating results raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. On February 2, 2021, Forta received a PPP loan in the amount of $422,900. This PPP loan bears a fixed interest rate of 1% over a five-year term, is guaranteed by the federal government, and does not require collateral. The SBA has informed Forta that $339,070 of the outstanding principle is eligible for forgiveness. Forta is evaluating the SBA’s conclusion. 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. Future growth plans will include efforts to increase tax and investment advisory activity through TMN members. There is no guaranty that the Company will achieve these objectives. 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 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk. Our business is sensitive to fluctuations in interest rates. Any significant increase in interest rates could have a material adverse effect on certain revenue generating transactions which may affect Company’s ability to continue as a going concern.