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 three months ended December 31, 2021.
Plan of Operations
Financial Gravity Companies, Inc. (the "Company") is headquartered in Lakeway
Texas, with locations in Monterey, California and Cincinnati, Ohio. Company,
along with its subsidiary companies, 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., formerly Sofos Investment 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
December 31, 2021.
Financial Gravity Enhanced Markets, LLC, formerly, MPath Advisor Resources, 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.
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Financial Gravity Family Office Services, LLC ("FGFOS") is a registered
investment advisor ("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") is a broker-dealer, a registered
investment advisor, and a licensed insurance agent. It primarily operates in
Colorado. As part of its annual review of the performance of its subsidiaries,
Company has decided to discontinue Forta's broker/dealer operations, and is in
the process of completing that transition.
Growth comes from the following reportable segments:
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 months ended December 31, 2021 compared to
the three months ended December 31, 2020
Revenues
For the three months ended December 31, 2021, revenue decreased $111,784 to
1,595,893 from $1,707,677 for the three months ended December 31, 2020. The
principal components of the decrease in revenue are: decreased revenue of
approximately $604,000 from Forta, increased investment management revenue from
FGAM of approximately $91,000, decreased revenue from TMN of approximately
$111,000, and increased revenue from FGEM of approximately $143,000 as compared
to the three months ended December 31, 2020, and one time revenue from FGIS of
$30,000 for referral fees.
Operating Expenses
Cost of services activity decreased $16,765 to $18,782 for the three months
ended December 31, 2021 from $35,547 for the three months ended December 31,
2021. The cost of services is credit card processing fees and Forta cost of
brokerage services.
Professional services expenses include legal expense, professional fees, and
business consulting. Professional services expenses decreased $35,536 to 97,194
for the three months ended December 31, 2021 from $132,730 for the three months
ended December 31, 20219 This decrease is primarily due to an decrease in legal
fees.
Depreciation and amortization expenses include depreciation on fixed assets and
amortization of definite lived intangibles. Depreciation and amortization
expenses decreased $13,368 to $21,962 for the three months ended December 31,
2021 from $35,330 for the three months ended December 31, 2020. The decrease is
due to some assets becoming fully depreciated.
General and administrative expenses decreased $194,150 to $142,616 for the three
months ended December 31, 2021 from $336,766 for the three months ended December
31, 2020. The decrease is primarily due to reduction in rents, due to tendering
the Denver leased space back to the landlord, $134,656, and a reduction in
technology expenditures, $97,775.
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Marketing expenses increased slightly by $6,506 to 27,052 for the three months
ended December 31, 2021 from $20,546 for the three months ended December 31,
2020. The increase is due to the Company increasing some marketing channels.
Compensation expenses increased $26,670 to $1,361,452 for the three months ended
December 31, 2021 from $1,334,782 for the three months ended December 31, 2020.
The overall increase was principally due to increases of $177,358 in Salaries,
offset by reductions in Commissions $125,287 and employee insurance $16,311.
The Company experienced a decrease in its net loss of $119,620 to a net loss of
$74,740 for the three months ended December 31, 2021 from a net loss of $194,360
for the three months ended December 31, 2020, primarily attributable to the
reasons noted above. $71,869 of the net loss was attributed Forta's operations
which will be discontinued. Excluding Forta, the net loss was approximately
$1300 for the three months ended December 31, 2021.
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.
Accrued revenues are recorded for investment management fees that are paid in
arrears. The allowance for doubtful accounts was $0 and $0 as of December 31,
2021 and September 30, 2021, respectively.
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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 generate 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 generate 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 has five levels of network subscription services 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 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, 2021 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
December 31, 2021, dividend yield of 0%, expected life of 10 years and
volatility of 35% to 40% in 2020. 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.
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Liquidity and Capital Resources
As of December 31, 2021, the Company had cash and cash equivalents of $353,183.
The increase in cash and cash equivalents from September 30, 2021 was due to net
cash provided by operating activities of $49,897 and net cash used in investing
activities of $0, and net cash used in financing activities of $2,584.
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 three months ended December 31, 2021, the Company reported $1,595,893 in
revenue, a net loss of $74,740, increase of cash of $47,314, and an accumulated
deficit of $14,488,610. 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.
In in February of 2021, Forta received a PPP loan of $422,900. The loan may be
forgiven, in part or whole, if the proceeds are used to retain and pay employees
and for other qualifying expenditures. The Company expects that the full
proceeds of the PPP loan will be eligible for forgiveness, which would result in
an increase in capital of $422,900.
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
and the investment advisory activity of the members to increase assets under
management and Company's revenue. Future growth plans will include efforts to
increase 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.
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FINANCIAL GRAVITY COMPANIES, INC. 