Quarterly Report (10-q)

Table of Contents 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the three months ended December 31, 2020

 

OR

 

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

 

Financial Gravity Companies, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada	001-34770	20-4057712
(State or other jurisdiction of incorporation or organization)	(Commission File No.)	(IRS Employee Identification No.)

 

12600 Hill Country Blvd., Suite R-275, Bee Cave, Texas 78738

(Address of Principal Executive Offices)

 

800-588-3893

(Issuer Telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class	Trading Symbol	Name of each exchange on which registered
N/A		N/A

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

 

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [_]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

	Large accelerated filer [_]	Accelerated filer [_]
	Non-accelerated filer [_]	Smaller reporting company [X]
	Emerging growth company [_]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes [_] No [X]

 

The number of shares outstanding of the registrant’s Common Stock as of February 17, 2021 was 83,618,412.

 

 

 

 

FINANCIAL GRAVITY COMPANIES, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Part I
Item 1.	Financial Statements
	Consolidated Balance Sheets at December 31, 2020 (unaudited) and September 30, 2020	3
	Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2020 and 2019	4
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended December 31, 2020 and 2019	5
	Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2020 and 2019	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
Part II
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults upon Senior Securities	29
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
SIGNATURES		31

 

 

 

 

 

 

 

 

 

 

2

 

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

 

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

 

		December 31, 2020				September 30, 2020
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	431,092			$	482,854
Trade accounts receivable, net			135,400				114,970
Right to use lease asset			68,466				259,645
Prepaid expenses and other current assets			238,982				238,324
Total current assets			873,940				1,095,793
OTHER ASSETS
Property and equipment, net			59,855				81,712
Proprietary content, net			131,051				143,643
Right to use lease asset			177,537				–
Intellectual property			53,170				53,170
Goodwill			8,475,305				8,475,305
TOTAL ASSETS		$	9,770,858			$	9,849,624
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable – trade		$	7,058			$	107,674
Accrued expenses			1,178,227				1,067,392
Contract liabilities			64,070				76,470
Deferred rent			117,343				–
Line of credit			49,145				54,112
Lease liability – current			16,541				259,645
Related Party Payables			65,937				69,838
Notes payable			29,625				23,596
Total current liabilities			1,527,946				1,658,727
Notes payable - net of current			705,431				712,982
Lease liability - non-current			229,462				–
Total non-current liabilities			934,893				712,982
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; 300,000,000 shares authorized; 83,618,412 shares issued and outstanding as of December 31, 2020 and 83,618,412 shares issued and outstanding as of September 30, 2020			83,618				83,618
Additional paid-in capital			14,409,550				14,385,086
Accumulated deficit			(7,185,150	)			(6,990,790	)
Total stockholders’ equity			7,308,018				7,477,914
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	9,770,858			$	9,849,624

 

The accompanying notes are in integral part of these consolidated financial statements.

 

 

 

 

3

 

 

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended December 31, 2020 and 2019

(Unaudited)

 

 

		December 31, 2020				December 31, 2019
REVENUE
Broker Dealer Income		$	268,098			$	–
Investment management fees			839,029				408,096
Service income			600,550				283,107
Total revenue			1,707,677				691,203
OPERATING EXPENSES
Cost of services			35,547				12,012
Professional services			132,730				115,333
Depreciation and amortization			35,330				26,022
General and administrative			336,766				98,831
Marketing			20,546				21,113
Salaries and wages			1,334,782				578,812
Total operating expenses			1,895,701				852,123
Net operating loss			(188,024	)			(160,920	)
OTHER EXPENSE
Interest expense			(1,113	)			(1,669	)
Other Income (Expense)			–				150,547
Total other expense			(1,113	)			148,878
Net Loss before Income taxes			(189,137	)			(12,042	)
Income Taxes			(5,223	)			–
NET LOSS		$	(194,360	)		$	(12,042	)
LOSS PER SHARE - Basic and Diluted		$	–			$	–

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

4

 

 

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three-month periods ended December 31, 2020 and 2019

(Unaudited)

 

 

		Number of Shares Issued and Outstanding				Common Stock Par Value Amount				Additional Paid-In Capital				Accumulated Deficit				Total
Balance at September 30, 2019			41,436,033			$	41,436			$	7,391,592			$	(6,199,115	)		$	1,233,913
Stock based employee compensation expense			–				–				3,810				–				3,810
Stock options exercised			12,799				13				(13	)			–				–
Private Placement stock issue			75,757				76				24,924				–				25,000
Net loss			–				–				–				(12,042	)			(12,042	)
Balance at December 31, 2019			41,524,589			$	41,525			$	7,420,313			$	(6,211,157	)		$	1,250,681
Balance at September 30, 2020			83,618,412			$	83,618			$	14,385,086			$	(6,990,790	)		$	7,477,914
Stock based employee compensation expense			–				–				24,464				–				24,464
Net loss			–				–				–				(194,360	)			(194,360	)
Balance at December 31, 2020			83,618,412			$	83,618			$	14,409,550			$	(7,185,150	)		$	7,308,018

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

5

 

 

Financial Gravity Companies, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended December 31,

(Unaudited)

 

 

		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(194,360	)		$	(12,042	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization			35,330				26,022
Stock based compensation			60,170				7,085
Right of use of lease asset			–				23,136
Changes in operating assets and liabilities:
Receivables			(20,430	)			12,877
Accounts receivable - related party			–				–
Prepaid expenses			(658	)			(27,254	)
Accounts payable – trade			(100,616	)			45,605
Accrued expenses and other liabilities			75,129				(30,013	)
Related Party Payable			(3,901	)			–
Deferred revenue			104,944				(28,048	)
Lease liability			–				(23,136	)
Net cash used in operating activities			(44,392	)			(5,768	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for purchase of property and equipment			(881	)			(3,770	)
Net cash used in investing activities			(881	)			(3,770	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from lines of credit			–				1,502
Proceeds from notes payable			–				–
Payments on notes payable			(1,522	)			(4,386	)
Payments on line of credit			(4,967	)			(3,402	)
Proceeds from the sale of common stock			–				25,000
Net cash provided by financing activities			(6,489	)			18,714
TOTAL INCREASE IN CASH AND CASH EQUIVALENTS			(51,762	)			9,176
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			482,854				36,053
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	431,092			$	45,229
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	1,113			$	1,689
Taxes		$	5,223			$	–

 

The accompanying notes are in integral part of these consolidated financial statements.

 

 

 

 

 

6

 

 

Financial Gravity Companies, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.	NATURE OF BUSINESS

 

Financial Gravity Companies, Inc., and subsidiaries (the “Company”) is headquartered in Austin Texas, with locations in Allen, Texas, Denver, Colorado and Cincinnati, Ohio. The currently operating wholly owned subsidiaries of the Company include:

 

Sofos Investments, Inc. (“Sofos”). Sofos is a registered investment advisor (“RIA”), registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses, including money management, financial planning, and wealth management. Sofos commenced its money management services in late 2019, and by December 2020 had in excess of $100,000,000 in assets under management.

 

Tax Master Network, LLC, runs the Tax Master Network® (“TMN”) that provides four primary services including monthly subscriptions to the TMN systems, coaching and marketing services. TMN currently supports over 300 Certified Public Accountants (“CPA”) and Enrolled Agent professionals, training them to support clients through tax planning services. TMN has developed the Certified Tax Master® that includes client acquisition and retention systems. TMN also offers tax planning services through the Tax Blueprint®, which includes an extensive individualized review and assessment of the client’s tax situation. The initial assessment sets the requirements for a custom Tax Blueprint® for each client to use as guide to implementation of the identified tax savings strategies. Finally, TMN offers the Tax Operating System, which is a system for integrating and executing tax planning strategies. 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.

 

Tax Master Network, LLC gives CPAs, Enrolled Agents, and other tax professionals a system for marketing, selling, and fulfilling tax-planning engagements. The system rests on two proprietary SAAS-based applications, the Tax Ninja software, which uses non-technical language in written reports introducing clients to tax-saving concepts and strategies; and the Tax Operating System®, which automates implementation of tax strategies. The system also includes: 1) marketing and practice-management tools and resources; 2) access to the Technical Training Center and the Sales Training Center to support members; 3) the monthly Fueled program which promotes personal development education; 4) the weekly Tax Beat client newsletter (a client newsletter); and 6) the Certified Tax Master® designation (which identifies members as offering special training not usually available to clients). TMN membership also includes the Financial Advisor Technical Education (FATE) program, which serves two goals: 1) it helps tax planners do a better job helping clients manage tax exposure in their investment portfolios; and 2) it gives members a proprietary "done for you" path into the investment advisory business.

 

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”) is a broker-dealer, a registered investment advisor, and a licensed insurance agent. It primarily operates in Colorado and has independent advisors and representative in other states. Forta will be focused on attracting independent advisors and supporting TMN members as they grow their financial advisory businesses. Forta is implementing plans to recruit independent advisors which will increase revenue. Forta does not hold funds or securities for customers or owe money or securities to customers. Pursuant to Rule 15c3-1 of the Securities Exchange Act of 1934, the Forta is required to maintain minimum net capital of $100,000 and ratio of aggregate indebtedness to net capital shall not exceed 15 to 1. On December 31, 2020, the Forta’s net capital was $294,485 and the aggregate indebtedness to net capital was 78.72%. The Company is exempt from certain provisions of Rule 15c3-3 of the Securities Exchange Act of 1934. Such exemption is in accordance with paragraph (k) (2) (ii) of the Rule.

 

 

 

 

7

 

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting polices consistently applied in the preparation of the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is as follows.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of its subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation.

 

Beginning as of May 21, 2020 Forta’s assets and liabilities are included in Company’s assets and liabilities and Forta’s results of operations have been consolidated with Company’s results.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an initial maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash balances at financial institutions located throughout the United States, which at times may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Cash does not include restricted cash, including the net capital deposit of approximately $100,000 at First Clearing, which is recorded on the balance sheet with prepaid expenses and other current assets.

 

Receivables

 

Trade accounts receivable are carried at the invoiced amount less an 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 a 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. The allowance for doubtful accounts was $0 as of December 31, 2020 and September 30, 2020, respectively.

 

In the normal course of business, the Company may extend credit to its customers, on an unsecured basis, substantially all of whom are in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.

 

Prepaid Expenses and other current assets

 

Prepaid expenses consist of expenses the Company has paid for prior to the service or good being provided. These prepaid expenses will be recorded as expense at the time the service has been provided.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to earnings over their estimated service lives by the straight-line method.

 

 

 

 

8

 

 

Maintenance and repairs are charged to earnings as incurred; major repairs and replacements are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

 

Proprietary Content

 

The proprietary content acquired as a part of the TMN purchase has been recognized in the accompanying consolidated balance sheets at $525,100, the value attributed to it on the date of the purchase. The proprietary content is being amortized on a straight-line basis over an eight- year estimated life. During each of the three months ended December 31, 2020 and 2019, the Company recorded amortization expense of $16,544 and $16,410 respectively, on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at December 31, 2020 was $394,049 and $377,505 at September 30, 2020.

 

Future amortization of proprietary content is estimated to be as follows for the years ended September 30:

 

2021		$	49,632
2022			81,419
		$	131,051

 

Non-compete Agreements

 

Non-compete agreements entered into as a part of the TMN purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed to such agreements on the date of the purchase. The non-compete agreements are being amortized on a straight-line basis over the five-year term of the non-compete clause of the agreement. During each of the three months ended December 31, 2020 and 2019, the Company recorded amortization expense of $0 and $1,315 respectively on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization was $26,300 at September 30, 2020. This asset is fully depreciated and written off, as of September 30, 2020.

 

Intellectual Property

 

The Company accounts for intellectual property in accordance with GAAP and accordingly, intellectual property are stated at cost. Intellectual property with indefinite lives are not amortized but are tested for impairment at least annually. Management has determined that the intellectual property have an indefinite life and do not consider the value of intellectual property recorded in the accompanying consolidated balance sheets to be impaired as of December 31, 2020 and September 30, 2020.

 

Goodwill

 

Goodwill represents the excess of the value of the purchase price and related costs over the identifiable assets from business acquisitions. The Company conducts an annual impairment assessment, at the reporting unit level, of its recorded goodwill. The Company assesses qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than it is carrying amount. The qualitative factors evaluated by the Company include: macro-economic conditions of the local business environment, overall financial performance, and other entity specific factors as deemed appropriate. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than it is carrying amount, a two-step impairment test is performed. Management determined, by assessing the qualitative factors, that it is more likely than not that the fair value of the reporting unit is greater than it carries value. Management does not consider the value of goodwill recorded in the accompanying consolidated balance sheets to be impaired as of December 31, 2020 and September 30, 2020.

 

 

 

9

 

 

Goodwill consists of the following:

 

		December 31, 2020				September 30, 2020
TMN Goodwill		$	1,094,702			$	1,094,702
Forta Goodwill			7,380,603				7,380,603
Total Goodwill		$	8,475,305			$	8,475,305

 

Income Taxes

 

The Company records federal and state income, which requires an asset and liability approach for financial accounting and reporting for income taxes based on tax effects of differences between the financial statement and tax basis of assets and liabilities.

 

The Company accounts for all uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 – Income Taxes (“ASC 740”). ASC 740 provides guidance on de-recognition, classification, interest and penalties and disclosure related to uncertain income tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no accrued interest, penalties or uncertain tax positions as of December 31, 2020 and September 30, 2020.

 

From time to time, the Company is audited by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes. The Company’s Federal returns since 2016 are still subject for examination by taxing authorities.

 

Earnings Per Share

 

Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Average number of common shares were 83,618,412 and 41,495,070 for the three months ended December 31, 2020 and 2019, respectively.

 

For the three months ended December 31, 2020, approximately 3,626,446 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. For the three months ended December 31, 2019, approximately 2,161,605 common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive.

 

Revenue Recognition

 

The Company adopted the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates (“ASU”) ASU 2014-09, Revenue from Contracts with Customers October 1, 2019 on a modified basis. As the initial adoption of the standard did not have a material impact on the Company's financial condition or results of operations, no cumulative effect was recognized at the date of initial application. The Company also had no significant changes to systems, processes, or controls.

 

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.

 

 

 

 

10

 

 

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 MPath). 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 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 December 31, 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.

 

Sofos generates 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 period.

 

Forta generates commission revenue from the sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized on a trade date basis for commission revenue and upon acceptance of insurance policies by insurers.

 

MPath generates revenue from insurance marketing services for insurance agents, including sourcing of insurance policies through selling agreements.

 

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.

 

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 $408,473 and $424,326 or the three months ended December 31, 2020 and 2019, respectively.

 

 

 

 

 

11

 

 

The Company received revenue from Forta’s operations for the three months ended December 31, 2020 including:

 

Investment Advisory fees		$	430,556
Commission-based transactions			268,098
Insurance and Other Service Revenue			46,454
Total Revenue		$	745,108

 

The Company received revenue from TMN’s operations from the following major sources for the three months ended December 31:

 

		2020				2019
TMN membership subscriptions		$	228,664			$	159,401
Tax Blueprints			127,500				24,000
Commissions/Referrals			25,301				11,224
Total		$	381,464			$	194,625

 

The Company received revenue from MPath’s operations from insurance sales of $172,602 and $0 for the three months ended December 31, 2020 and 2019, respectively.

 

Advertising and Marketing

 

Marketing costs are charged to operations when incurred. Marketing expenses were $20,546 and $21,113 for the three months ended December 31, 2020 and 2019, respectively.

 

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, 2020 and 1.49% to 2.55% in 2019, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40% in 2020 and 100% in 2019 respectively. 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.”

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

 

 

 

12

 

 

Adjustments

 

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended September 30, 2020, included in its Annual Report on Form 10K.

 

Going Concern

 

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, 2020, the Company reported $1,707,677 in revenue, a net loss of $194,360, use of cash of $51,762, and an accumulated deficit of $7,185,150. 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 May 8, 2020, the Company received a PPP loan in the amount of $283,345. Additionally, on May 15, 2020, Forta received a PPP loan in the amount of $377,700. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans 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 loans will be eligible for forgiveness, which would result in an increase in capital of $661,045.

 

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 headcount through recruiting of individuals advisors and groups of advisors. There is no guaranty that the Company will achieve these objectives. 

 

Future Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses, which amends how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, which applies to trade accounts receivable and the calculation of the allowance for uncollectible accounts receivable. The new standard will become effective for the Company for fiscal years beginning after December 31, 2019, with early adoption permitted. In November of 2019, the FASB issued ASU 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which deferred the effective date of ASU Topic No. 2016-13 to fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements. Since the Company currently uses an expected loss from customers method, the Company does not anticipate the adoption of ASU 2016-13 will have a material impact on the Company's financial condition or results of operations.

 

 

 

 

13

 

 

In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new guidance was effective for the Company beginning October 1, 2020.

 

3.	SEGMENT REPORTING

 

We manage our business in four reportable segments. Each of our active subsidiaries is treated as a segment. We evaluate the performance of our operating segments based on a segment’s share of consolidated operating income. Therefore, for instance, the tax unit, Financial Gravity Tax (“FGT”), was sold in October of 2019 because the Company did not see growth potential in the unit’s accounting and direct tax advice operations. Certain growth operations of the tax unit, including the tax operating system, have been taken over by TMN.

 

CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THREE MONTHS ENDED DECEMBER 31, 2019

 

		FGC				FGT (discontinued)				MPath				Sofos				TMN				TOTAL
Income
Service Income*		$	153,002			$	69,721			$	–			$	16,305			$	194,626			$	433,654
Investment Management Fees			75				–				–				408,020				–				408,096
Total Income			153,077				69,721				–				424,326				194,626				841,750
Gross Profit			153,077				69,721				–				424,326				194,626				841,750
Expense
Compensation Expense			365,978				(78	)			–				148,558				64,354				578,812
Cost of services			–				4,410				–				–				7,602				12,012
Depreciation Amortization			11,672				–				–				–				14,350				26,022
General and Administrative			79,462				1,620				50				1,211				16,488				98,831
Marketing			14,964				2,411				–				20				3,717				21,113
Professional Services			120,902				–				–				(9,116	)			3,547				115,333
Total Expense			592,978				8,363				50				140,673				110,058				852,123
Net Operating Income			(439,901	)			61,358				(50	)			283,652				84,568				(10,373	)
Interest Expense			1,724				–				–				–				(55	)			1,669
Net Other Income			(1,724	)			–				–				–				55				(1,669	)
Net Income/(Loss)		$	(441,624	)		$	61,358			$	(50	)		$	283,652			$	84,623			$	(12,042	)

 

* Includes non-recurring revenue of $150,000 from the sale of the tax unit 

 

 

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CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THREE MONTHS ENDED DECEMBER 31, 2020

  

		Eliminations				FGC				Forta				MPath				Sofos				TMN				TOTAL
Income
Broker Dealer		$	–			$	–			$	268,098			$	–			$	–			$	–			$	268,098
Service Income			–				–				46,454				172,602				–				381,495				600,550
Investment Management Fees			–				–				430,556				–				408,473				–				839,029
Income from Inv in Subsidiaries			(60,096	)			60,096				–				–				–				–				–
Total Income			(60,096	)			60,096				745,108				172,602				408,473				381,495				1,707,677
Gross Profit			(60,096	)			60,096				745,108				172,602				408,473				381,495				1,707,677
Expense
Compensation Expense			–				420,274				623,997				50,450				120,311				119,750				1,334,782
Cost of services			–				–				14,150				–				11,074				10,324				35,547
Depreciation & Amortization			–				35,258				72				–				–				–				35,330
General and Administrative			–				44,612				234,683				3,628				3,556				50,287				336,766
Marketing			–				6,856				10,609				–				–				3,080				20,546
Professional Services			–				58,299				47,493				–				–				26,939				132,730
Total Expense			–				565,300				931,004				54,079				134,940				210,380				1,895,701
Net Operating Income			(60,096	)			(505,204	)			(185,896	)			118,523				273,533				171,114				(188,024	)
Other Income/Expense			–				–				–				–				–				–				–
Total Other Expense			–				1,113				5,223				–				–				–				6,336
Net Other Income			–				(243,956	)			237,620				–				–				–				(6,336	)
Net Income/(Loss)		$	(60,096			$	(749,160	)		$	51,669			$	118,523			$	273,533			$	171,114			$	(194,360	)

 

4.	BUSINESS ACQUISITION

 

On May 21, 2020 the Company acquired 100% of the stock of Forta. Forta is a broker dealer, registered investment advisor and an insurance brokerage, subject to FINRA, SEC and insurance regulation. Forta’s financial performance is included in Company’s consolidated statements starting as of May 21, 2020.

 

The Company acquired Forta in May of 2020 in exchange for 45,785,879 shares of Company common stock. A liability of $699,117 has been recorded for 4,178,564 shares of common stock related to the acquisition remaining to be issued as of December 31, 2020. 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 within the Company, 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.

 

 

 

 

15

 

 

Purchase Price Allocation

 

The purchase price of $7,652,415 was based upon the share price of Company’s stock as of May 21, 2020 and $52,000 note payable. We have used preliminary fair value estimates for the assets acquired and liabilities assumed for the acquisition. We believe significant synergies may arise from this acquisition, as a result of which the purchase price was in excess of the fair value of the net assets acquired and, as a result, we have preliminarily recorded goodwill of $7,380,603, which is based upon book value, to account for adjustments made. We have not yet finalized estimates that relate to certain tangible and intangible assets, including customer relationships, trade names, contracts. Our estimates and assumptions for these acquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods (up to one year from the acquisition date).

 

Assets Acquired and Liabilities Assumed

 

Forta Financial Group, Inc.

Assets Acquired and Liabilities Assumed

As of May 21, 2020

 

PURCHASE PRICE		$	7,652,415
ASSETS
Current Assets
Cash			710,154
Accounts Receivable			20,882
Other Current Assets			135,056
Total Current Assets			866,093
Other Assets			582,330
TOTAL ASSETS			1,448,423
LIABILITIES
Liabilities
Current Liabilities
Total Accounts Payable			18,215
Total Other Current Liabilities			710,131
Total Current Liabilities			728,346
Long-Term Liabilities
Total Long-Term Liabilities			448,265
Total Liabilities			1,176,611
Goodwill		$	7,380,603

 

 

 

 

16

 

 

5.	PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at December 31:

  

		Estimated Service Lives		December 31, 2020				September 30, 2020
Furniture, fixtures and equipment		2 to 5 years		$	56,257			$	407,580
Internally developed software		5 years			152,000				152,000
					208,257				559,580
Less accumulated depreciation and amortization					(148,402	)			(477,868	)
				$	59,855			$	81,712

 

Depreciation expense was $42,419 and $37,647 during the years ended December 31, 2020 and 2019, respectively.

 

6.	INTELLECTUAL PROPERTY

 

Intellectual property consists of the following:

 

Intellectual property at September 30, 2020		$	53,170
Intellectual property purchased at cost			–
Intellectual property at December 31 2020		$	53,170

 

 

7.

LEASES

 

In February 2016, the FASB issued ASU 2016-02 Leases, which changed financial reporting as it relates to leasing transactions to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. In July 2018, the FASB issued ASU No. 2018-10 Codification Improvements to Topic 842, Leases and ASU No. 2018-11 Leases (Topic 842): Targeted Improvements. In March 2019, the FASB issued ASU No. 2019-1 Codification Improvements to Topic 842, Leases. The Company adopted these ASUs on October 1, 2019 on a modified retrospective basis. The Company did not elect the hindsight practical expedient and did elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases. The initial adoption of the standard recognized right-of-use assets of $323,097 and lease liabilities of $337,454 on the Company’s statement of financial position with no impact on the Company's results of operations. The Company had no significant changes to processes or controls.

 

 

 

 

17

 

 

The Company leases their office space through an operating lease in Denver Colorado runs through 2024 and non-material offices leases in Cincinnati, Ohio, and short-term tenancies in Austin, Texas, Allen, Texas and Loveland, Colorado. Company’s lease agreements obligate the Company to pay real estate taxes, insurance, and certain maintenance costs, which are accounted for separately. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term. Lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses.

 

The Company also leases certain equipment under operating leases.

 

Total rent expense for the three months ended December 31, 2020 was $117,344 for Forta’s the Denver Lease (Greenwood Village – the lease ends in May 2024). As part of the lease amendment entered into with the lessor in December 2020, the rent owed for September to December 2020 was deferred and will be paid over the term of the amended lease.” The difference between rental expense and rental payments is recorded as deferred rent in the accompanying consolidated balance sheets. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. Company also has short term leases that are insignificant in its other locations.

 

Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows:

  

		Denver Lease
Rental Payments
2021		$	66,730
2022			139,721
2023			141,630
2024			47,369
Total Rental Payments		$	395,450
Less: Deferred Rent			(117,343	)
Interest			(32,104	)
Net Rental Payments			246,003

 

8.	LINE OF CREDIT

 

The Company has a revolving line of credit with Wells Fargo Bank, N.A. in the amount of $67,500. Amounts drawn under this line of credit are due on demand, and monthly interest and principal payments are required. The interest rate on the line of credit is 9.5%. This line of credit is supported by the personal guarantee of John Pollock. Line of credit balance was $49,145 and $62,019 at December 31, 2020 and 2019, respectively, and $54,112 at September 30, 2020.

 

 

 

 

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9.	NOTES PAYABLE

 

On April 19, 2019, the Company entered into an unsecured Promissory Note Payable with Charles O’Banon (“O’Banon”), a customer, in the amount of $32,205. The note is in settlement of tax penalties and interest he incurred, that were proximately caused by the Company’s actions. The monthly principal and interest payments are $623, with a balloon payment of $14,048 in April 2022. The note is being repaid over 36 months and bears an interest rate of 6%. The Company has instituted abatement efforts on O’Banon’s behalf, with the taxing authority, however the abatement was denied. The outstanding balance on December 31, 2020 and 2019, was $23,534 and $29,401 respectively.

 

On August 31, 2020, the Company entered into an agreement with John DuPriest (DuPriest), a former officer of Forta, in settlement pursuant to employment termination. The parties entered into an unsecured promissory note to DuPriest in the amount of $52,000.00, bearing interest of 5%, payable over 26 months beginning with January 15, 2021 through February 15, 2023.

 

On May 8, 2020, the Company received a Paycheck Protection Program (“PPP”) loan in the amount of $283,345. Additionally, on May 15, 2020, Forta received a PPP loan in the amount of $377,700. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral.

 

The loans 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 loans will be eligible for forgiveness, which would result in an increase in capital of $661,045. Forta submitted its forgiveness application to the SBA in December of 2020, and Company is awaiting the SBA’s follow-up on its application for forgiveness.

 

The Company’s maturities of debt subsequent to December 31, 2020 are as follows:

 

2021		$	354,119
2022			372,019
2023			10,441
		$	736,579

 

 

 

 

 

 

19

 

 

 

10.	ACCRUED EXPENSES

 

Accrued expenses increased by $110,835 for the three months ending December 31, 2020 to $1,178,227 from $1,067,392 as of September 30, 2020. Accrued expenses consist of the following at December 31:

 

		December 31, 2020				September 30, 2020
SAR Liability		$	67,499			$	31,793
Accrued payroll			141,523				105,458
Commissions payable			1,250				16,783
State Tax liability			4,108				3,165
Federal Tax liability			7,634				3,355
Credit Cards			7,697				12,798
Other Accounts payable			699,117				699,117
Accrued operating expenses			249,398				194,923
			–				–
		$	1,178,227			$	1,067,392

 

11.	INCOME TAXES

 

For the three months ending December 31, 2020 and 2019, the effective tax rate of 0% varies from the U.S. federal statutory rate primarily due to state income taxes, net losses, certain nondeductible expenses, changes in the federal statutory rate are from 35% to 21%, and an increase in the valuation allowance associated with the net operating loss carryforwards. Our deferred tax assets related to net operating loss carryforwards remain fully reserved due to uncertainty of utilization of those assets.

 

A deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit in the accompanying consolidated statements of operations are the result of changes in the assets and liabilities for deferred taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount for any tax benefits that, based on available evidence, are not expected to be realized. Income tax expense is the current tax payable or refundable for the year plus or minus the net change in the deferred tax assets and liabilities. Deferred income taxes of the Company arise from the temporary differences between financial statement and income tax recognition of NOL carry-forwards.

 

The deferred tax assets and liabilities in the accompanying consolidated balance sheets include the following components at December 31, 2020 and September 30, 2020:

 

		31-Dec-20				30-Sep-20
Net non-current deferred tax assets:
Net operating loss carry-forward			1,338,849				1,314,515
Property and equipment			3,681				4,329
Total			1,342,530				1,318,844
Net non-current deferred tax liabilities:
Intangible assets			(6,446	)			(7,221	)
Net			1,336,084				1,311,623
Less valuation allowance			(1,336,084	)			(1,311,623	)
Net deferred taxes			–				–

 

 

 

 

20

 

 

12.	COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

 

From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of its business or otherwise. It is management’s opinion that there are no legal proceedings the outcome of which will be material to its ability to operate or market its services, its consolidated financial position, operating results or cash flows.

 

13.	STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company is authorized to issue up to 300,000,000 shares of common stock, par value $0.001 per share.

 

During the three months ended December 31, 2020 and 2019, the Company sold 0 shares and 75,757 for $25,000, respectively.

 

14.	STOCK OPTION PLAN

 

Effective February 27, 2015, the Company established the 2015 Stock Option Plan (the “Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options. The maximum number of shares of stock that may be issued pursuant to the exercise of options under the Plan is 9,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after February 27, 2018.

 

Effective November 22, 2016, the Company established the 2016 Stock Option Plan (the “2016 Plan”). The Board of Directors of the Company has the authority and discretion to grant stock options and stock appreciation rights (SARs). The maximum number of shares of stock that may be issued pursuant to the exercise of options under the 2016 Plan is 20,000,000. Eligible individuals include any employee of the Company or any director, consultant, or other person providing services to the Company. The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under the Plan after ten years from the date of adoption of the 2016 Plan.

 

Stock option and stock appreciation rights activity is summarized as follows:

 

		Shares Under Option				Value of Shares Under Option				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life
Outstanding - September 30, 2019			2,788,476				550,455			$	0.29			87 months
Granted			5,600,000				1,361,200			$	0.23			114 months
Exercised			(116,375	)			(13,850	)		$	0.09			93 months
Canceled or expired			(1,299,405	)	*		(1,845,870	)		$	0.27
Outstanding - September 30, 2020			6,972,696				51,935			4	0.17			106 months
Granted			0				0				0
Exercised			0				0				0
Canceled or expired			0				0				0
Outstanding - December 31, 2020			6,972,696				618,413			$	0.17			106 months
Exercisable - December 31, 2020			1,363,944							$	0.31			72 months

 

* 500,000 SARs grants reflected as expired prior to September 30, 2020 actually expired in the three months ended December 31, 2020.

 

21

 

 

Unamortized share-based compensation expense as of December 31, 2020 amounted to $424,496 which is expected to be recognized over the next 4.6685 years. 

 

Total compensation expense, included in salaries and wages, of previously unamortized stock compensation was $60,170 and $7,085 for the three months ended December 31, 2020 and 2019.

 

On November 27, 2019, the 2016 Plan was amended to allow grants of other equity related rights, including Stock Appreciation Rights. During the three months ended December 31, 2020, 0 and 0 options and SARs were granted, respectively. SARs are recorded as a liability because there is a cash settlement option.

 

15.	RELATED PARTY TRANSACTIONS

 

As a result of the acquisition of the TMN business in 2016, the Company is obligated to make payments to TaxTuneup, LLC, which is an entity owned by Edward A. Lyon (a current board member), each month totaling $16,500. The total paid under these agreements in the three months ended December 31, 2020 and 2019 respectively, were $49,500 and $49,500,

 

On April 12, 2019, the Company entered into a loan agreement with John Pollock, Executive Vice President of the Company. The note bears interest at 2.76% and will be repaid in six equal installments of $2,520, beginning July 1, 2019. The balance of the loan at December 31, 2020 was $5,187 and at September 30, 2020 was $5,152.

 

In addition, there are payables owed to Mr. Pollock of approximately $51,000 related to services rendered by him to Company, and $10,000 owed to a former principal of TMN for services rendered. There is no specific due date on these obligations, but Company plans are substantial reductions in the amounts owing this fiscal year.

 

16.	SUBSEQUENT EVENTS

 

In February of 2021, Forta received a second draw of a PPP Loan in the amount of $422,900. Company believes that the loan will be forgiven.

 

In December 2020 Company entered into a non-binding term sheet for the acquisition of two related companies with investment advisory practices. The term sheet contemplates that Company will be issuing shares 8,000,000 shares of its common stock in exchange for 100% ownership of the two companies. The owners of the two companies and some staff will become employees of Forta. The term sheet provides for a close of the transaction in February 2021.

 

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.

 

 

 

22

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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, 2020.

 

Plan of Operations

 

Financial Gravity is a parent company of best of breed financial services companies including brokerage, wealth management, estate planning, family office services, risk management, business and personal tax planning, business consulting, and financial advisor services. Financial Gravity's mission is to synergistically bring together companies that create symbiotic advantages to each other in order to bring a complete financial experience to the clients that we serve.

 

Financial Gravity’s Subsidiaries:

 

Forta Financial Group, Inc.

 

Forta was acquired effective May 21, 2020 and is a securities broker dealer, a registered investment advisor and a licensed insurance agency. Forta is a registered broker-dealer with the Securities and Exchange Commission (''SEC") and with the Financial Industry Regulatory Authority ("FINRA"). Forta is also a member of the Securities Investor Protection Corporation ("SIPC"). The Company's securities activities is limited to introducing and forwarding securities on a fully disclosed basis to a carrying broker-dealer. The Company as a matter of policy does not hold funds or securities for customers or owe money or securities to customers. Pursuant to Rule 15c3-1 of the Securities Exchange Act of 1934, the Forta is required to maintain minimum net capital of $100,000 and ratio of aggregate indebtedness to net capital shall not exceed 15 to 1. On December 31, 2020, the Forta’s net capital was $294,485 and the aggregate indebtedness to net capital was 78.72%. The Company is exempt from certain provisions of Rule 15c3-3 of the Securities Exchange Act of 1934. Such exemption is in accordance with paragraph (k) (2) (ii) of the Rule.

 

Sofos Investments, Inc. (formerly Financial Gravity Wealth, Inc.)

 

After saving thousands in taxes, clients are happy to trust us with the management of their wealth, especially when treated to a different wealth management experience. Sofos is a Registered Investment Advisory firm. An RIA is an advisor or firm engaged in financial planning and wealth management business and is registered either with the Securities and Exchange Commission “SEC” or state securities authorities. An RIA has a fiduciary duty to his or her clients, which means that he or she has a fundamental obligation to provide suitable investment advice and always act in the clients’ best interests.

 

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

 

 

 

 

23

 

 

Tax Master Network, LLC

 

Tax Master Network “TMN” was a key acquisition in fiscal year 2016. TMN supports over 300 CPA and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. Not only did this acquisition bring high-end tax planning to Financial Gravity, but the TMN customer base adds significant business development opportunities for Forta and Sofos. The Company developed the Certified Tax Master® for this group and rolled out new client systems in mid-2016. TMN also provides tax services through its “Tax Blueprint®” system which identifies several strategies for lowering the client's taxes.

 

Results of Operations for the three months ended December 31, 2020 compared to the three months ended December 31, 2019

 

Revenues

 

For the three months ended December 31, 2020, revenue increased $865,927 to $1,707,677 from $841,750 (which included non-recurring revenue of $150,000 from the sale of the tax unit) for the three months ended December 31, 2019. The principal components of the increase in revenue are: brokerage revenue of approximately $270,000 from Forta, increased investment management revenue from Forta and Sofos of approximately $430,000, and increased revenue from TMN and Mpath of approximately $170,000 as compared to the three months ended December 31, 2019.

 

Operating Expenses

 

Cost of services activity increased $23,535 to $35,547 for the three months ended December 31, 2020 from $12,012 for the three months ended December 31, 2020. 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 increased $17,397 to $132,730 for the three months ended December 31, 2020 from $115,333 for the three months ended December 31, 20219 This increase is primarily due to an increase in legal fees.

 

Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses increased $9,308 to $$35,330 for the three months ended December 31, 2020 from $26,022 for the three months ended December 31, 2019. The decrease is due to some assets becoming fully depreciated.

 

General and administrative expenses increased $237,935 to $336,766 for the three months ended December 31, 2020 from $98,831 for the three months ended December 31, 2019. The increase is primarily due to inclusion of Forta's expenses or approximately $235,000 for the period. 

 

Marketing expenses decreased slightly by $567 to $20,546 for the three months ended December 31, 2020 from $21,113 for the three months ended December 31, 2019. The decrease is due to the Company shutting down some previous marketing channels, while new channels have yet to be identified and implemented.

 

Compensation expenses increased $755,970 to $1,334,782 for the three months ended December 31, 2020 from $578,812 for the three months ended December 31, 2019. The overall increase was principally due to inclusion of Forta's compensation expense (approximately $624,000), increase in Mpath's compensation expense (approximately $50,000) and increases of compensation expenses at Sofos and Company (approximately $73,000).

 

The Company experienced an increase in its net loss of $182,318 to a net loss of $194,360 for the three months ended December 31, 2020 from a net loss of $12,042 for the three months ended December 31, 2019, primarily attributable to the reasons noted above.

 

 

 

 

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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.

 

The Company derives its revenues primarily from six components: Investment Management Fees, Brokerage Commissions, Tax Master Network subscriptions, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales.

 

Sofos Investments, Inc. generates 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. Investment management fees are calculated as a percentage of assets under management for the period. Investment management fees are Revenue is recognized as earned, at the end of each period. Fees are withdrawn from investor assets monthly, in arrears.

 

Commission revenue is derived from the sale of securities, annuities and premiums on life insurance policies. The revenue is recognized when commissions are earned from the sale of securities, and when it is determined that insurance products are sold. Commissions are received after products are sole, issued or in force.

 

Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying consolidated balance sheets.

 

Tax Master Network has five levels of services that are charged and collected on a month-to-month subscription 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. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement. Subscription income is billed to client credit card monthly, on the monthly anniversary of client sign-up. Tax BluePrint sales are billed to the client after a preliminary assessment and client approval to move forward. Revenue recognized in 2020, that was included in the deferred revenue liability at the beginning of the year.

 

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

 

 

 

 

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Commission revenue is derived from the sale of premiums on life insurance policies held by third parties. The revenue is recognized as received from the insurer, issuer.

 

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.

 

Tax Master Network has 3 types of services that are charged and collected on a month-to-month subscription basis (Tax Master Network 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.

 

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, 2020 and September 30, 2020, 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, 2020, 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.

 

Liquidity and Capital Resources

 

As of December 31, 2020, the Company had cash and cash equivalents of $431,092. The decrease of $51,762 in cash and cash equivalents from September 30, 2020 was due to net cash used in operating activities of $44,392 and net cash used in investing activities of $881, and net cash used in financing activities of $6,489.

 

As shown below, at December 31, 2020, our contractual cash obligations totaled approximately $1,166,918, all of which consisted of debt principal.

 

		Payments due by period
Contractual obligations		Less than 1 year				1-3 years				4-5 years				Total
Notes payable		$	29,625			$	40,183			$	665,248			$	735,056
Lease liability			54,996				280,352				47,369				382,716
Line of Credit			49,145				–				–				49,145
Total contractual cash obligations		$	133,766			$	320,535			$	712,617			$	1,166,918

 

 

 

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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, 2020, the Company reported $1,707,677 in revenue, a net loss of $194,360, use of cash of $51,762, and an accumulated deficit of $7,185,204. 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 May 8, 2020, the Company received a PPP loan in the amount of $283,345. Additionally, on May 15, 2020, Forta received a PPP loan in the amount of $377,700. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans 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 loans will be eligible for forgiveness, which would result in an increase in capital of $661,045.

 

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 headcount through recruiting of individuals advisors and groups of advisors. There is no guaranty that the Company will achieve these objectives. 

 

Off Balance Sheet Transactions and Related Matters

 

Other than operating leases discussed in Note 4 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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.

 

Item 4. Controls and Procedures

 

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 September 30, 2020. 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 December 31, 2020 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.

 

 

 

27

 

 

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. Responsibility, 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 December 31, 2020. 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 December 31, 2020, 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 has been made since fiscal year end 2020.

 

 

 

 

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Part II Other Information

 

Item 1. Legal Proceedings

 

From time to time, we are a party to or otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. A subsidiary of the Company is currently involved in one legal proceeding, the outcome of which will not be material to our ability to operate or market our services, our consolidated financial position, results of operations or cash flows.

 

Item 1A. RISK FACTORS.

 

No changes from September 30, 2020 10-K annual report.

 

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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None

 

 

 

 

 

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Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

31.1	Rule 13a-14(a) Certification of the Principal Executive Officer.
31.2	Rule 13a-14(a) Certification of the Principal Financial Officer.
32	Section 1350 Certifications.
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: February 17, 2021	By: /s/ Scott Winters
	Scott Winters
	Chief Executive Officer
	(Principal Executive Officer)
Date: February 17, 2021	By: /s/ Paul Williams
	Paul Williams
	Chief Financial Officer
	(Principal Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Capacity	Date
/s/ Scott Winters		Co-Chairman, CEO	February 17, 2021
Scott Winters		(principal executive officer)
/s/ Paul Williams		Vice Chairman, CFO	February 17, 2021
Paul Williams		(principal financial officer)
/s/ John Pollock		Co-Chairman, EVP	February 17, 2021
John Pollock
/s/ Edward A. Lyon		Director	February 17, 2021
Edward A. Lyon
/s/ Jennifer Winters		Director	February 17, 2021
Jennifer Winters
/s/ William R. Nelson		Director	February 17, 2021
William R. Nelson

 

 

 

 

 

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