Financial Gravity Companies, Inc.: Form 10-Q for the period ended Dec 31, 2019

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 the Annual Report on Form 10K for the fiscal year ended September 30, 2019.

Plan of Operations

Financial Gravity is a parent company of best of breed financial services companies including brokerage, wealth management, estate planning, family office services, risk management, business and personal tax planning, business consulting, and financial advisor services. Financial Gravity's mission is to synergistically bring together companies that create symbiotic advantages to each other in order to bring a complete financial experience to the clients that we serve.

Financial Gravity’s Subsidiaries:

Financial Gravity Holdings, Inc.

Dissolved February 13, 2019.

Financial Gravity Operations, Inc.

Dissolved February 12, 2019.

Sofos Investments, Inc. (formerly Financial Gravity Wealth, Inc.)

After saving thousands in taxes, clients are happy to trust us with the management of their wealth, especially when treated to a different wealth management experience. Sofos is a Registered Investment Advisory firm. An RIA is an advisor or firm engaged in financial planning and wealth management business and is registered either with the Securities and Exchange Commission “SEC” or state securities authorities. An RIA has a fiduciary duty to his or her clients, which means that he or she has a fundamental obligation to provide suitable investment advice and always act in the clients’ best interests.

The Department of Labor’s fiduciary rule is officially dead. The fiduciary rule, also known officially as the “Conflict of Interest” rule, stated advisers have to give conflict-free advice on retirement accounts, putting their clients’ needs ahead of their own potential compensation.

Although the Department of Labor’s Fiduciary Rule was struck down by the Fifth Circuit Court, we will still maintain the fiduciary standard as a company, because we think it is best for the client.

Only 5% of all financial planners are RIAs. The advantage of the RIA model is lower cost to the client. Also, since RIAs are not compensated by commissions on financial products, their advice is considered less biased and more accurate. Coupled with tax savings, its status as a RIA makes the Company very attractive to the most profitable clients.

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.

Financial Gravity Ventures, LLC

This entity in the Company’s corporate family employs its merger strategy to acquire talent and build wealth for Financial Gravity Companies, Inc. and acquired companies. As mentioned earlier, Financial Gravity is pursuing several acquisition opportunities.

Tax Master Network, LLC

Tax Master Network “TMN” was a key acquisition in fiscal year 2016. TMN supports over 300 CPA and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. Not only did this acquisition bring high-end tax planning to Financial Gravity, but the TMN customer base adds significant business development opportunities for Financial Gravity Wealth. The Company developed the Certified Tax Master® for this group and rolled out new client systems in mid-2016. TMN also provides tax services through its “Tax Blueprint®” system which identifies several strategies for lowering the client's taxes.

Financial Gravity Tax, Inc. has no current operations. It sold its bookkeeping and tax preparation business October 31, 2019, and all other operations are consolidated into TMN.

Sash Corporation dba Metro Data Processing

Sash Corporation dba Metro Data Processing, based in Tulsa, OK was the Company’s first acquisition and Metro Data Processing is based in Tulsa, OK. The client list was sold to ADP in 2018. This entity is now inactive and awaiting dissolution.

Results of Operations for the three months ended December 31, 2019 compared to the three months ended December 31, 2018

Revenues

For the three months ended December 31, 2019, revenue decreased $157,515 to $841,750 from $999,265 for the three months ended December 31, 2018. The principal components of the decrease in revenue are: the sale Financial Gravity Tax, causing a decrease in revenue of $50,666, to $69,593 in revenue during the three months ended December 31, 2019 compared to $120,259 in the three months ended December 31, 2018; TBP Revenue decreased $86,000 to $24,000 for the three months ended December 31, 2019 compared to $110,000 in the three months ended December 31, 2018; Investment Management Fees decreased $14,335 to $408,096 for the three months ended December 31, 2019 compared to $422,430 for the three months ended December 31, 2018.

Operating Expenses

Cost of services activity decreased $1,793 to $12,012 for the three months ended December 31, 2019 from $13,805 for the three months ended December 31, 2018. The cost of services is credit card processing fees.

Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses increased $50,519 to $115,333 for the three months ended December 31, 2019 from $64,814 for the three months ended December 31, 2018. This increase is primarily due to an increase in legal fees of $45,856.

Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $2,780 to $26,022 for the three months ended December 31, 2019 from $28,802 for the three months ended December 31, 2018. The decrease is due to some assets becoming fully depreciated.

General and administrative expenses decreased $48,121 to $98,831 for the three months ended December 31, 2019 from $146,952 for the three months ended December 31, 2018. The decrease is primarily due to a decrease in technology expenses of $28,873 and a decrease in insurance expenses of $9,052.

Marketing expenses decreased $10,531 to $21,113 for the three months ended December 31, 2019 from $31,644 for the three months ended December 31, 2018. The decrease is due to the Company shutting down some previous marketing channels, while new channels have yet to be identified and implemented.

Salaries and wages expenses decreased $292,384 to $578,812 for the three months ended December 31, 2019 from $871,196 for the three months ended December 31, 2018. The overall decrease was principally due to decreases in Salaries and Wages – Outsourced, $160,465, Commissions, $118,999, and Stock based compensation, $41,169.

The Company experienced a decrease in its net loss of $187,330 to a net loss of $12,042 for the three months ended December 31, 2019 from a net loss of $199,372 for the three months ended December 31, 2018, 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 six components: Investment Management Fees, 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.

Financial Gravity Tax, Inc. generates service income from its consulting and other professional services performed. Revenue recognized as service is provided. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up.

Commission revenue is derived from the sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized when commissions are earned from insurers and issuers of the products. Commissions are received after products 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 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. TBP sales are billed to the client after a preliminary assessment and client approval to move forward. Revenue recognized in 2020, that was included in the deferred revenue liability at the beginning of the year.

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.

Tax Master Network has 3 types of services that are charged and collected on a month to month subscription basis (Tax Master Network 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.

Trade accounts receivable are carried only for subscription revenues not received in the period they apply to. The allowance for doubtful accounts was $0 and $0 as of December 31, 2019 and September 30, 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.

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 2.89% rates in 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40%.

Liquidity and Capital Resources

As of December 31, 2019, the Company had cash and cash equivalents of $45,229. The increase of $9,176 in cash and cash equivalents from September 30, 2019 was due to net cash used in operating activities of $5,768 and net cash used in investing activities of $3,770, and net cash provided by financing activities of $18,714.

Net cash used in operating activities was $5,768 for the three months ended December 31, 2019, compared to $7,250 net cash used in operating activities for the three months ended December 31, 2018. The net cash provided by operating activities for the three months ended December 31, 2019 was due to net loss of $12,042 adjusted primarily by the following: (1) depreciation and amortization of $26,022, stock based compensation of $7,085, decrease in Right of use of lease asset of $23,166, increase in accounts payable of $45,605, increase in prepaid expenses of $27,254, an decrease in accrued expenses of $30,013, an decrease in deferred revenue of $28,048, decrease in trade accounts receivable of $12,877 and a decrease in the Lease liability $23,136.

Net cash provided by financing activities was $18,714 for the three months ended December 31, 2019, compared to net cash provided by financing activities of $70,798 for the three months ended December 31, 2018. Financing activities for the three months ended December 31, 2019 consisted primarily of proceeds from the sale of common stock of $25,000, $1,502 in proceeds from the line of credit; offset with payments made to reduce the Company’s debt obligations in the amount of $7,788.

As shown below, at December 31, 2019, our contractual cash obligations totaled approximately $89,502, all of which consisted of debt principal.

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

Other than operating leases discussed in Note 4 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.

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.

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on its evaluation, management concluded as of September 30, 2019 that its disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, described below in Management’s Report on Internal Control Over Financial Reporting. Notwithstanding the identified material weaknesses, management believes the financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.