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" above.
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 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 individuals and groups that provide investment and financial advice. 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. Sofos commenced its money management
services in late 2019, and by September 2020 was approaching $100,000,000 in
assets under management.
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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. In addition, TMN will be launching new efforts to increase
subscribers, including a revamped tax operating system and financial advisor
business development programs that will assist TMN subscribers in increasing
their business activity. The goal is to provide TMN subscribers with a platform
for them to enhance their business opportunities in the areas of investment and
financial advice and to increase their effectiveness as tax advisors to small
businesses and individuals.
MPath Advisor Resources, LLC ("MPath") MPath is an insurance marketing
organization and provides insurance products and services to insurance agents or
agencies. This is a new venture that will be focused upon insurance marketing
and will capture business synergies in the sale of insurance products by
financial advisors with TMN and with Forta.
Forta Financial Group, Inc. ("Forta") Forta is a broker dealer, registered
investment advisor and an insurance brokerage, subject to FINRA, SEC and
insurance regulation. The goal is to have Forta focus on attracting independent
advisors and to support TMN members as they grow their financial advisory
businesses. Forta is implementing plans to recruit independent advisors.
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.
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.
Business Acquisition and Disposition
The Company acquired Forta in 2020 in exchange for stock. Forta is a broker
dealer, and its acquisition presented the Company with an opportunity to compete
in the broker dealer market, and to try to grow in this area of financial
services. Forta also has key employees who assumed vital executive leadership
roles, including key executives who will focus on improving operations and
growth opportunity. Forta also contributed key operating assets, including in
excess of $700,000 in cash, and annual revenues in excess of $3,000,000.
The Company disposed of its tax unit. The tax unit has the tax operating system,
but that could be run more effectively by TMN, so the decision was made to
transfer that activity to the TMN. The tax unit was left with minor tax and
accounting operations, and those activities did not present a significant upside
to the Company.
Revenues
For the year ended September 30, 2020, revenue decreased $387,568 to $3,687480
from $4,075,048 for the year ended September 30, 2019. The principal drivers for
this are a decrease in revenue from the discontinued tax operations of $649,830
and reduced revenue from reduction of the number of advisors at Sofos of
$1,112,944, as well as some minor non-recurring revenue at Financial Gravity,
offset by an increase in revenue from Forta of $1,270,339, an increase in
revenue from TMN of $35,844, an increase of revenue from MPath of $73,882. The
combined revenue for the Company includes only the revenue from Forta since May
21, 2020. Forta generated in excess of $2 million of revenue from October 1,
2019 through May 20, 2020 (the day prior to the acquisition of Forta). On a
twelve-month pro forma basis that included Forta's revenue, the Company would
have generated in excess of $6,000,000 in revenue, or approximately $2,000,000
in annualized increased revenue.
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Operating Expenses
Cost of services increased by $18,144 to $73,071 for the year ended September
30, 2020 from $54,927 for the year ended September 30, 2019, primarily due
increased costs at Forta of $33,784, offset by decreases at Financial Gravity
($5,946), discontinued tax operations ($21,355), and increase at TMN of $8,891.
Professional services expenses include consulting fees, legal expense,
professional fees, and business consulting. Professional services expenses
increased $233,528 to $375,263 for the year ended September 30, 2020 from
$141,835 for the year ended September 30, 2019. The increase included
professional fees at Forta of $93,095, an increase in professional fees at
Financial Gravity of $321,761 (including adjustments in 2019 for accrual of
expenses that were greater than the fees incurred), offset by decreases in
professional fees at Sofos of $73,793, at TMN of $69,516, and at the
discontinued tax practice of $43,526.
Depreciation and amortization expenses include depreciation on fixed assets and
amortization of definite lived intangibles. Depreciation and amortization
expenses decreased $22,282 to $166,586 for the year ended September 30, 2020
from $189,070 for the year ended September 30, 2019. The decrease is primarily
due to an increase of expense at Financial Gravity of $152,173 (including the
full impairment of Trademarks ($69,000), offset by a decrease at TMN of
$159,602, a small decrease at Sofos of $4,165, and a decrease at the
discontinued tax practice of $10,953.
General and administrative expenses increased $138,979 to $672,784 for the year
ended September 30, 2020 from $533,805 for the year ended September 30, 2019.
The increase is primarily due increased costs at Forta of $275,272, and
Financial Gravity, offset by decreases at other subsidiaries including the
discontinued tax department operations ($163,452), Sofos reductions due to fewer
advisors and at TMN aggregating approximately ($250,000).
Marketing expenses decreased $6,368 to $125,161 for the year ended September 30,
2020 from $131,529 for the year ended September 30, 2019. The decrease is
primarily due to a reduction of costs at the discontinued tax operations of
($22,788), and reductions in outside vendors by bringing marketing efforts
in-house at TMN ($76,678) and Sofos ($15,838), offset by an increase in
marketing expenses at Forta of $20,568, at Financial Gravity $85,110, and at
MPath $3300. The variance in expenses also reflects a change in marketing
efforts influenced by Covid 19 restrictions that shut down some previous
marketing channels and a move toward the independent advisor model at Forta
where advisors cover their own marketing expenses.
Compensation expenses decreased $315,438 to $3,186,305 for the year ended
September 30, 2020 from $3,501,744 for the year ended September 30, 2019. The
decrease is primarily due to an increase in executive compensation at Financial
Gravity of $1,580,121, the increase of compensation at Forta of $808,670 that
includes commissions, and a small increase at MPath, offset by a decrease in
compensation at the discontinued tax operations of $1,023,467, Sofos of $917,359
that includes reduction in commissions, at TMN of $703,375 related to reduction
in employees and outsourced services and a move toward the independent advisor
model at Forta where advisors cover their own marketing expenses.
The Company experienced an increase in net loss of $168,190 to a net loss of
$791,675 for the year ended September 30, 2020 from a net loss of $623,485 for
the year ended September 30, 2019, primarily attributable to the reasons noted
above. The variance in loss for the period also reflects the impact of Covid-19
related reduction in marketing and face to face sales, which impacted revenues.
This was offset by the sale of the tax unit for $150,000.
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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.
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, five days before each quarter-end or monthly
in arrears. Revenues are recognized in the period earned.
The Company earns commission when it buys and sells securities and various
insurance products on behalf of its customers. Each time a customer enters into
a buy or sell transaction, the Company charges a commission. Commissions and
related clearing expenses are recorded on the trade date (the date that the
Company fills the trade order by finding and contracting with a counterparty and
confirms the trade with the customer), and commission revenue from the sale of
premiums on life insurance policies is recognized as received from the insurer,
issuer.
The Company generates services income which is recognized as consulting and
other professional services are performed by the Company. Income is recognized
as services are delivered. 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. Trade
accounts receivable are carried only for investment management fees that are
paid in arrears. The allowance for doubtful accounts was $0 and $0 as of
September 30, 2020 and 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.
The Company received revenue from Sofos' operations that are primarily from
investment management fees, including money management fees. Investment
management fees are based upon a percentage of assets under management and
totaled $1,255,457 for the fiscal year after elimination of intercompany
accounts.
The Company received revenue from Forta's operations from (the date of the
merger) from the following sources from May 21, 2020 through fiscal year ending
September 30,2020 including:
Investment Advisory fees $ 757,290
Commission-based transactions 436,024
Insurance and Other Service Revenue 77,024
Total Revenue $ 1,270,339
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TMN has 3 types of services that are charged and collected on a month-to-month
subscription basis (TMN 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.
The Company received revenue from TMN's operations from the following sources
during the fiscal year ending September 30,2020 including:
TMN membership subscriptions: $ 733,838
Tax Blueprints: 224,000
Commissions/Referrals: 61,889
Miscellaneous: (1,715 )
Total: $ 1,018,012
The Company received revenue from MPath's operations from insurance sales of
$73,882 during the fiscal year ending September 30,2020.
The total of all revenue also includes approximately $70,000 from discontinued
operations and minor non-recurring revenue.
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 1.32% in the year ended
September 30, 2020 and 1.50% to 2.89% in 2019, dividend yield of 0%, expected
life of 10 years and volatility of 159% in 2020 and volatility of 25% to 34.05%
in 2019.
Liquidity and Capital Resources
As of September 30, 2020, the Company had cash and cash equivalents of $482,854,
as compared $36,053 as of September 30, 2019. The increase of $446,801 in cash
and cash equivalents from September 30, 2019 was due to net cash provided
financing from Paycheck Protection Program ("PPP") through loans to Financial
Gravity of $283,345, and other sources of cash as per the Financial Gravity's
Statement of Cash Flows, including approximately $700,000 in cash at Forta at
the May 21, 2020 merger date.
As shown below, at September 30, 2020, Financial Gravity's contractual cash
obligations totaled approximately $970,741 all of which consisted of operating
lease obligations and debt principal.
Payments due by period
Less than 1
Contractual obligations year 1-3 years 4-5 years Total
Notes payable $ 354,119 $ 382,460 $ 0 $ 736,579
Operating leases 180,050 180,050
Line of Credit 54,112 0 0 54,112
Total contractual cash obligations $ 588,281 $ 382,460 $ 0 $ 970,741
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.
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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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