Financial Gravity Companies, Inc.: Form 10-Q for the period ended Jun 30, 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 and Uncertainties” 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 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 investment marketing and financial advisory and broker dealer firms. The Company is actively identifying potential acquisition candidates to fuel more rapid growth.

Financial Gravity’s Subsidiaries and Reportable Segments:

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 (“TMN”) 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”) Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation.

Growth comes from the following reportable segments:

Tax services and financial advisory services, including Tax Blueprint® and Tax Operating System® services through TMN.

Brokerage and wealth management services through Forta and money management and investment advisory services through Sofos. Other products and services include insurance and other miscellaneous products and services.

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

Results of Operations for the three and nine months ended June 30, 2020 compared to the three and nine months ended June 30, 2019

RESULTS OF OPERATIONS

As described in Notes to Consolidated Financial Statements, “Segment Reporting”, we evaluate the performance of our operating segments based on net income.

Revenues

For the three months ended June 30, 2020 revenues increased $20,950 to $947,491 from $926,541 for the three months ended June 30, 2019. For the nine months ended June 30, 2020, revenues decreased $837,483 to $2,249,580 from $3,087,063 for to the nine months ended June 30, 2019. The principal components of the variance in revenue for the three months and nine months included the decrease in revenue from the sale of Company’s tax and accounting subsidiary in the amount of $97,485 and $267,748, respectively; reduction in insurance sales of $77,263 and $343,144, respectively; reduction of investment management fees of $117,549 and $60,034, respectively; reduction of TMN membership revenue for the nine months in $247,204 through membership reduction, and reductions in other revenue generating activities of close to $150,000 in 2019. $417,142 in investment management revenue was generated by Forta in April through May 21, 2020 that is not reflected in the revenue during the three-month period because the acquisition of Forta is not included in revenue until May 21, 2020.

Operating Expenses

Cost of services increased by $2,187 to $17,659 for the quarter ended June 30, 2020 from $15,473 for the three months ended June 30, 2019, and decreased by $440, to $44,317 from $44,783 for the nine months ended June 30, 2020 and June 30, 2019, respectively. The variance in expenses for the three month and nine-month periods arises from decreased credit card processing fees due to disposal of the Financial Gravity Tax line of business.

Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses decreased $57,524 to $61,681 for the three months ended June 30, 2020 from $119,205 for the three months ended June 30, 2019. Professional services decreased $35,117 to $234,881 for the nine months ended June 30, 2020 from $278,998 for the nine months ended June 30, 2019. The variances are principally comprised of a decrease of $63,750 for the three months and $148,000 for the nine months, respectively, related to reclassing related party consulting fees to compensation, offset by costs of implementing new technology offerings.

Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses increased $8,401 to $38,636 for the three months ended June 30, 2020 from $30,235 for the three months ended June 30, 2019. The decrease is due to accelerating the depreciation of computers and software, reducing the useful lives over which they are depreciated to three year lives. Depreciation and amortization decreased $72,392 to $86,443 for the nine months ended June 30, 2020, from $158,835 for the nine months ended June 30, 2019. The principal difference is a charge to amortization for full impairment of Trademarks, $69,000.

General and administrative expenses increased $28,854 to $168,084 for the three months ended June 30, 2020 from $139,220 for the three months ended June 30, 2019. General and administrative expenses decreased $62,705 to $348,158 for the nine months ended June 30, 2020 from $410,863 for the nine months ended June 30, 2019. The variance in expenses for the three month and six-month periods related to Company discontinuing its tax and accounting subsidiary. Marketing expenses increased $8,504 to $56,865 for the three months ended June 30, 2020 from $48,330 for the three months ended June 30, 2019. Marketing expenses decreased $18,526 to $90,999 for the nine months ended June 30, 2020 from $109,945 for the nine months ended June 30, 2019. The variance in expenses for the three month and six-month periods from reflects a change in marketing efforts influenced by Covid 19 restrictions that shut down some previous marketing channels, while new channels are just starting to open up.

Compensation Expense expenses increased $364,106 to $867,330 for the three months ended June 30, 2020 from $503,224 for the three months ended June 30, 2019 and decreased $337,578 to $2,014,413 for the nine months ended June 30, 2020 from $2,351,991 for the nine months ended June 30, 2019. The increase for the three months ended June 30, 2020 was principally driven by Forta salaries ($85,000) and commissions ($86,000) being included in compensation. The decrease for the nine months was principally due to termination of advisors ($250,000) and decreases in stock-based compensation ($145,000).

The Company experienced an increase in its net loss of $254,299 to a net loss of $271,170 for the three months ended June 30, 2020 from a net loss of $16,941 for the three months ended June 30, 2019. The Company experienced a decrease in its net loss of $99,027 to a net loss of $437,512 for the nine months ended June 30, 2020 from a net loss of $536,538 for the nine months ended June 30, 2019. The variance in loss for the three months ended June 30, 2020 reflects the impact of the Covid-19 reduction in marketing and sales, which impacted revenue, and the reduction of non-recurring revenue from the sale of the tax unit ($150,000). The decrease in the net loss for the nine months was primarily due to the sale of the tax unit.

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. Certain revenue generated by Forta is paid quarterly, in advance, and recognized each month.

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 0.59% in the quarter ending June 30, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 100% in 2020 and 35% to 40% in 2019.

Liquidity and Capital Resources

As of June 30, 2020, the Company had cash and cash equivalents of $629,322. The increase of $593,269 in cash and cash equivalents during the nine months ended June 30, 2020 was primarily due to net cash used in operating activities ($407,842), the purchase of Forta, ($332,454, net of Forta PPP loan), and the receipt of funding of the PPP loans, (Financial Gravity $283,345 and Forta $377,700). The aggregate PPP loans are expected to be forgiven.

As shown below, at June 30, 2020, our contractual cash obligations totaled approximately $466,402, which consisted of operating lease obligations and debt principal, excluding the PPP loan balances.

Payments due by period

(1) This includes an estimate of $25,000 for shares issued to the Allen TX landlord pursuant to the termination agreement.

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

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.

On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Quarterly Report on Form 10-Q, COVID-19 has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue for an extended period, there could be a material and adverse financial impact to our results of operations. For more information about the risks associated with COVID-19, see Part II, “Item 1A. Risk Factors and Uncertainties” of this Quarterly Report on Form 10-Q.

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.