Financial Gravity Companies, Inc.: Form 10-Q for the period ended Mar 31, 2020

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 our historical results of operations during the periods presented and our financial condition. This MD&A should be read in conjunction with our financial statements and the accompanying notes and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause our actual results to differ materially from management’s expectations. See the sections entitled “Risk Factors” below.

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 make more money and build wealth, most often with 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 investment marketing and financial advisory and broker dealer firms. In fiscal year 2019, the Company entered into a purchase agreement with Forta, which management believes will be consummated by June 1, 2020, or before. The Company is actively identifying additional potential acquisition candidates to fuel more rapid growth.

Financial Gravity’s Subsidiaries:

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.

Tax Master Network, LLC 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.

MPath Advisor Resources, LLC (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.

Forta Financial Group, Inc. (“Forta”) On September 30, 2019, the Company entered into a merger agreement with Forta, to acquire Forta in exchange for Company stock. The merger is awaiting FINRA approval. When approved, the Forta shareholders will own more than 50% of the Company. Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation.

Organic growth has come in three key areas.

Tax Services and financial advisory services, including Tax Blueprint® and ongoing Tax Operating System® services that are under development.

Brokerage and Wealth Management Services – and brokerage and investment advisory services after the Forta acquisition and money management and investment advisory services through Sofos. Other Products and Services (Insurance and other miscellaneous products and services).

All future growth is expected to come from these key areas, organic growth, acquisitions, and strategic alliances.

Results of Operations for the three and six months ended March 31, 2020 compared to the three and six months ended March 31, 2019

Revenues

For the three months ended March 31, revenues decreased $544,576 to $616,680 from $1,161,256 for the three months ended March 31, 2019. For the six months ended March 31, 2020, revenues decreased $746,766 to $1,308,755 from $2,055,521 for to the six months ended March 31, 2019. The principal components of the decrease in revenue for the six months was the sale Financial Gravity Tax ($117,000), reduction in revenue from the sale of TBPS ($48,500), reduction in the sale of insurance and commission products ($265,880), TMN subscriptions also fell ($169,000), as did referral commissions ($37,570).

Operating Expenses

Cost of services decreased by $859 to $14,646 for the quarter ended March 31, 2020 from $15,505 for the three months ended March 31, 2019, and decreased by $2,653, to $26,657 from $29,310 for the six months ended March 31, 2020 and March 31, 2019, respectively. The decrease is primarily related to decreased credit card processing fees.

Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses increased $43,821 to $70,646 for the three months ended March 31, 2020 from $26,825 for the three months ended March 31, 2019. Professional services increased $186,866 to $186,979 for the six months ended March 31, 2020 from $113 for the six months ended March 31, 2019. The variances are comprised of increases in legal fees of $15,765 for the three months ended March 31, 2020 and $61,620 for the six months ended March 31, 2020, and increases in “Professional Services – Other” of $24,825 for the three months and $102,076 for the six months, respectively, related to implementing new technology offerings.

Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $77,715 to $21,785 for the three months ended March 31, 2020 from $99,500 for the three months ended March 31, 2019. The decrease is principally due to a charge of $69,300 in the three months ended March 31, 2019, to amortization, for the full impairment of Trademarks. Depreciation and amortization decreased $80,793 to $47,807 for the six months ended March 31, 2020, from $128,600 for the six months ended March 31, 2019. The principal difference is the same charge to amortization for full impairment of Trademarks.

General and administrative expenses decreased $38,538 to $85,903 for the three months ended March 31, 2020 from $124,441 for the three months ended March 31, 2019. General and administrative expenses decreased $89,654 to $181,812 for the six months ended March 31, 2020 from $271,466 for the six months ended March 31, 2019. The decreases in costs are across the board.

Marketing expenses decreased $16,499 to $13,472 for the three months ended March 31, 2020 from $29,971 for the three months ended March 31, 2019. Marketing expenses decreased $26,988 to $34,585 for the six months ended March 31, 2020 from $61,573 for the six months ended March 31, 2019. The decrease is due to the Company shutting down some previous marketing channels, while new channels have yet to be fully identified and implemented.

Salaries and wages expenses decreased $558,861 to $ 570,209 for the three months ended March 31, 2020 from $1,129,070 for the three months ended March 31, 2019, and decreased $841,426 to $ 1,149,020 for the six months ended March 31, 2020 from $1,990,446 for the six months ended March 31, 2019. The decrease was principally due to decreases in Commissions, $244,700, and Stock based compensation, $136,814 for the three months ended March 31, 2020. The decrease was principally due to decreases in Commissions of $340,829, stock based compensation of $177,983 for the six months ended March 31, 2020.

The Company experienced a decrease in its net loss of $153,916 to a net loss of $162,107 for the three months ended March 31, 2020 from a net loss of $316,023 for the three months ended March 31, 2019. The Company experienced a decrease in its net loss of $348,919 to a net loss of $171,352 for the six months ended March 31, 2020 from a net loss of $520,271 for the six months ended March 31, 2019. The decreases are primarily attributable to the reasons noted above, and the proceeds from the sale of the FG Tax unit for $150,000.

Significant Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of Financial Gravity’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.

Services income is recognized as consulting and other professional services are performed by the Company.

Commission revenue is derived from the sale of premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy is issued.

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.

Tax Master Network has 5 levels of subscription services that are charged and collected on a month to month basis (Tax Master basic, advance, and elite membership, all-stars coaching, and networker). 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.

Accounts receivable are primarily generated from the TMN subscriptions (collected in advance), the sale of investment products and services (collected directly from the custodian or issuer), and of products related to tax planning (collected in advance). The accounts are carried at the invoiced amount less estimate made for doubtful accounts based on management’s review of outstanding balances. The collectability of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and review of specific accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted and when management determines the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when received.

In the normal course of business, the Company may extend 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 on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rates of 1.56% in the quarter ending March 31, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 7 years and volatility of 100% in 2020 and 35% to 40% in 2019.

Liquidity and Capital Resources

As of March 31, 2020, the Company had cash and cash equivalents of $22,579. The decrease of ($13,474) in cash and cash equivalents during the six months ended March 31, 2020 was primarily due to net cash used in operating activities and the sale of Financial Gravity Tax, Inc.

Net cash used in operating activities was $29,415 for the six months ended March 31, 2020. The net cash used in operating activities was due to net loss of $171,352 adjusted primarily by the following: (1) depreciation and amortization of $47,807, stock based compensation of $16,251, and an increase in Accounts payable – trade and related party payables of $125,286.

Net cash provided by financing activities was $18,375 for the six months ended March 31, 2020. This was principally due to payments on the line of credit ($6,996) and notes payable ($2,890), offset by the sale of common stock ($25,000) option and SAR grant activity.

As shown below, at March 31, 2020, our contractual cash obligations totaled approximately $460,010, which consisted of operating lease obligations and debt principal.

Payments due by period

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 our 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 our operations. Management 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 8 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.

Stock Market Risk. Our investment advisory business is subject to stock market risks. Revenue is generally based upon a percentage of the value of assets under management. Stock market downturns can affect the value of assets under management and therefore affect revenue.

As of the end of the period covered by this report, our principal executive officer and principal financial officer, evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, we concluded that, as of the date of the evaluation, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding required disclosures. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

No changes from September 30, 2019 10-K annual report other than:

In December 2019, a novel strain of coronavirus, referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to other countries, including the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Further, the President of the United States declared the COVID-19 pandemic a national emergency. States in which we operate declared states of emergency related to the spread of COVID-19 and issued executive orders directing individuals to stay at their place of residence for an indefinite period of time.

The financial markets demonstrated significant volatility in reaction to the virus outbreak. There has been considerable strain on companies in many sectors of the economy. Investors suffered significant decreases in the value of their investment portfolios, and the economy has significantly shut down. It is unclear when the economy will start up again, and the lingering effects are not known. During periods of high volatility and uncertainty many investors choose to stop ongoing investment activity and sit on the sidelines until the markets become more stable.

The Company’s revenues are adversely affected when investors reduce their investment activities. In addition, part of Company’s revenues is based upon the value of assets under management. If the investment portfolios of clients decrease in value, the fees charged for investment advice also decreases.

The Company could be affected by lack of access to its offices, although that seems to have had little short term impact as employees have succeeded in maintaining productivity while working remotely. The long term effects, however, may present significant issues.

Any significant shutdown of the economy for a sustained period will affect the Company’s revenue which could lead to losses.