Financial Gravity Companies, Inc.: Form 10-Q for the period ended Jun 30, 2022

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 nine months ended June 30, 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 $100,000,000 in assets under management as of June 30, 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.

Growth comes from the following activities:

Tax services and financial advisory services, including Tax Blueprint® services through TMN, as well as investment advisory services by TMN subscribers to their clients through Family Office Services. Family Office Services include 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 nine months ended June 30, 2022 compared to the three and nine months ended June 30, 2021

Revenues

For the three months ended June 30, 2022, revenue decreased approximately $330,000 to approximately $1,347,000 from approximately $1,677,000 for the three months ended June 30, 2021. The principal components of the decrease in revenue are: reduction of revenue of approximately $770,000 from winding down of Forta, an increase of revenue from FGFOS of approximately $553,000, decreases in revenue for FGAM and TMN of approximately $218,000, and minor changes in other units as compared to the three months ended June 30, 2021. For the nine months ended June 30, 2022, revenue decreased approximately $548,000 to approximately $4,518,000 from $5,066,000 for the nine months ended June 30, 2021. The principal components of the decrease in revenue are: decrease in revenue of approximately $2,026,000 from winding down of Forta, decreased investment management revenue from FGAM of approximately $283,000, and increase in revenue from FGFOS of approximately $1,272,000, an increase from insurance sales from FGEM of approximately $443,000, and minor changes on other operating units as compared to the nine months ended June 30, 2021.

Operating Expenses

Compensation expense decreased approximately $340,000 to approximately $1,195,000 for the three months ended June 30, 2022 from approximately $1,535,000 for the three months ended June 30, 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 $405,000 to approximately $3,865,000 for the nine months ended June 30, 2022 from approximately $4,271,000 for the nine months ended June 30, 2021. The decrease was principally due to a decrease at Forta as it winds down (approximately $1,035,000) and the increased salary and commission expense at FGCO (approximately $581,000) and FGFOS (approximately $351,000) and other smaller amounts at the other operating units.

Cost of services activity decreased approximately $19,500 to approximately $9,500 for the three months ended June 30, 2022 from approximately $29,000 for the three months ended June 30, 2021. Cost of services activity increased approximately $215,000 to approximately $302,000 for the nine months ended June 30, 2022 from $87,000 for the nine months ended June 30, 2021. The three and nine-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 $14,000 to approximately $108,000 for the three months ended June 30, 2022 from approximately $123,000 for the three months ended June 30, 2021. This increase is primarily due to an increase in legal fees and accounting arising from Forta operations. Professional services expenses decreased approximately $24,000 to approximately $328,000 for the nine months ended June 30, 2022 from approximately $353,000 for the nine months ended June 30, 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 stayed flat to approximately $22,000 for the three months ended June 30, 2022 from $22,000 for the three months ended June 30, 2021. Depreciation and amortization expenses decreased approximately $24,000 to approximately $65.000 for the nine months ended June 30, 2022 from $89,000 for the nine months ended June 30, 2021. The decrease is due to deceleration of depreciation of certain assets.

General and administrative expenses decreased approximately $220,000 to approximately $120,000 for the three months ended June 30, 2022 from approximately $340,000 for the three months ended June 30, 2021. The decrease is primarily due to the wind down of Forta. General and administrative expenses decreased approximately $507,000 to approximately $389,000 for the nine months ended June 30, 2022 from approximately $896,000 for the nine months ended June 30, 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).

Marketing expenses stayed flat at approximately $23,000 for the three months ended June 30, 2022 from approximately $23,000 for the three months ended June 30, 2021. Marketing expenses increased by approximately $35,000 to approximately $91,000 for the nine months ended June 30, 2022 from approximately $56,000 for the nine months ended June 30, 2021. The increases are due to the Company spending more in marketing channels.

The Company experienced a decrease in its net loss of approximately $7,100,000 to a net profit of approximately $47,000 for the three months ended June 30, 2022 from a net loss of approximately $7,112,000 for the three months ended June 30, 2021. The Company experienced a decrease in its net loss of approximately $6,980,000 to a net loss of approximately $425,000 for the nine months ended June 30, 2022 from a net loss of $7,406,000 for the nine months ended June 30, 2021. The changes are primarily attributable to the reasons noted above, and PPP Loan forgiveness, and no write off of goodwill in 2022.

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, 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.

Accrued revenues are recorded for investment management fees that are paid in arrears. The allowance for doubtful accounts was $0 and $0 as of June 30, 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 a fixed fee based on TMN's estimate of potential future 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 June 30, 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 Compensation 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 June 30, 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.

Liquidity and Capital Resources

As of June 30, 2022, the Company had cash and cash equivalents of $208,000. Cash decreased during the nine months ending June 30, 2022 by approximately $98,000, 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 nine months ended June 30, 2022, the Company reported $3,171,235 in revenue, a net loss of $425,740, a decrease of cash of $98,100, and an accumulated deficit of $14,839,611. 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.

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.

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2022. 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 June 30, 2022 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 Form 10-Q 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.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. The Company’s Chief Executive Officer and Chief Financial Officer assessed the effectiveness of its internal control over financial reporting as of June 30, 2022. In making this assessment, its management used the criteria based on the framework in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2022, its internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles. The Company’s Chief Executive Officer and Chief Financial Officer reviewed the results of their assessment with its board of directors.

Based on its evaluation under this framework, management concluded that its internal control over financial reporting was not effective as of the evaluation date due to the factors stated below.

Insufficient Resources: The Company has inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting to be able to have appropriately designed and operating entity level controls including risk assessment; information and communication; monitoring; and financial reporting.

Inadequate Segregation of Duties: The Company has inadequate number of personnel to properly segregate duties to implement control procedures.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

No changes in Internal Control over Financial Reporting have been made since fiscal year end 2021.

Except as described below, no changes from September 30, 2021 10-K annual report.

In late March of 2022, one of Company’s larger investment advisors terminated the relationship with FGAM. The loss of this advisor could result in a reduction of revenue to the Company of over $25,000 per month after commissions to the advisor. Company is taking steps to address the effects of this termination.