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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Financial Gravity Companies Inc (PK) | USOTC:FGCO | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.10 | 33.33% | 0.40 | 0.30 | 0.40 | 0.40 | 0.37 | 0.37 | 1,835 | 19:28:53 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the three and nine Months ended June 30, 2021
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 ☒ 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 ☒ 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 ☒ | |
| 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 ☒
The number of shares outstanding of the registrant’s Common Stock as of August 24, 2021 was 91,618,412.
FINANCIAL GRAVITY COMPANIES, INC.
FORM 10-Q
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
The accompanying notes are a n integral part of these consolidated financial statements.
| 3 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months and nine months ended June 30, 2021 and 2020
(Unaudited)
| For the | For the | For the | For the | |||||||||||||
| Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Total Revenue | ||||||||||||||||
| Broker Dealer Income | $ | 244,470 | $ | – | $ | 767,284 | $ | – | ||||||||
| Investment Management Fee | 1,068,885 | 581,430 | 2,901,543 | 1,329,146 | ||||||||||||
| Service Income | 363,304 | 366,061 | 1,397,504 | 920,433 | ||||||||||||
| Total Revenue | 1,676,659 | 947,491 | 5,066,332 | 2,249,580 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Cost of services | 29,166 | 17,659 | 87,396 | 44,317 | ||||||||||||
| Professional services | 123,077 | 61,681 | 352,881 | 243,881 | ||||||||||||
| Depreciation and amortization | 21,594 | 38,636 | 89,098 | 86,443 | ||||||||||||
| General and administrative | 342,023 | 168,084 | 896,438 | 348,158 | ||||||||||||
| Marketing | 23,249 | 56,865 | 56,029 | 90,999 | ||||||||||||
| Salaries and wages | 1,535,930 | 867,330 | 4,271,396 | 2,014,413 | ||||||||||||
| Total Operating Expenses | 2,075,039 | 1,210,254 | 5,753,239 | 2,828,211 | ||||||||||||
| Operating Loss | (398,381 | ) | (262,763 | ) | (686,907 | ) | (578,631 | ) | ||||||||
| Other income (expense) | 661,045 | (20,747 | ) | 661,045 | 129,253 | |||||||||||
| Loss on impairment of Goodwill | (7,380,603 | ) | – | (7,380,603 | ) | – | ||||||||||
| Interest expense | (1,538 | ) | 12,341 | (3,808 | ) | 11,867 | ||||||||||
| Total other (expense) income | (6,721,096 | ) | (8,406 | ) | (6,723,366 | ) | 141,120 | |||||||||
| Net Loss before Income taxes | (7,119,477 | ) | (271,169 | ) | (7,410,273 | ) | (437,511 | ) | ||||||||
| Income Taxes | (7,634 | ) | – | (4,034 | ) | – | ||||||||||
| Net (Loss) | $ | (7,111,843 | ) | $ | (271,170 | ) | $ | (7,406,240 | ) | $ | (437,511 | ) | ||||
| Loss Per Share - Basic | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.12 | ) | $ | (0.01 | ) | ||||
| Loss Per Share - Diluted | $ | (0.08 | ) | $ | (0.08 | ) | ||||||||||
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 and nine-month periods ended June 30, 2021 and 2020
(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 | – | – | 36,147 | – | 36,147 | |||||||||||||||
| Stock options exercised | 12,799 | 13 | 170 | – | 183 | |||||||||||||||
| Private Placement stock issue | 75,757 | 76 | 24,924 | – | 25,000 | |||||||||||||||
| Stock issued in exchange for services | 382,932 | 383 | 49,617 | – | 50,000 | |||||||||||||||
| Forta acquisition | 41,115,527 | 41115 | 6,784,021 | – | 6,825,136 | |||||||||||||||
| Net loss | – | – | – | (437,512 | ) | (437,512 | ) | |||||||||||||
| Balance at June 30, 2020 | 83,023,048 | $ | 83,023 | $ | 14,286,471 | $ | (6,636,627 | ) | $ | 7,732,867 | ||||||||||
| Balance at March 31, 2020 | 41,524,589 | $ | 41,525 | $ | 7,425,269 | $ | (6,365,456 | ) | $ | 1,101,337 | ||||||||||
| Stock based employee compensation expense | – | – | 27,564 | – | 27,564 | |||||||||||||||
| Stock issued in exchange for services | 382,932 | 383 | 49,617 | – | 50,000 | |||||||||||||||
| Forta acquisition | 41,115,527 | 41,115 | 6,784,021 | – | 6,825,136 | |||||||||||||||
| Net loss | – | – | – | (271,170 | ) | (271,170 | ) | |||||||||||||
| Balance at June 30,2020 | 83,023,048 | $ | 83,023 | $ | 14,286,471 | $ | (6,636,627 | ) | $ | 7,732,867 | ||||||||||
| Balance at September 30, 2020 | 83,618,412 | $ | 83,618 | $ | 14,385,086 | $ | (6,990,790 | ) | $ | 7,477,914 | ||||||||||
| Stock based employee compensation expense | – | – | 60,978 | – | 60,978 | |||||||||||||||
| Net loss | – | – | – | (7,406,240 | ) | (7,406,240 | ) | |||||||||||||
| Balance at June 30, 2021 | 83,618,412 | $ | 83,618 | $ | 14,446,063 | $ | (14,397,030 | ) | $ | 132,653 | ||||||||||
| Balance at March 31, 2021 | 83,618,412 | $ | 83,618 | $ | 14,451,172 | $ | (7,285,186 | ) | $ | 7,249,604 | ||||||||||
| Stock based employee compensation expense | – | – | (5,107 | ) | – | (5,107 | ) | |||||||||||||
| Net loss | – | – | – | (7,111,844 | ) | (7,111,844 | ) | |||||||||||||
| Balance at June 30,2021 | 83,618,412 | $ | 83,618 | $ | 14,446,063 | $ | (14,397,030 | ) | $ | 132,653 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30,
(Unaudited)
| Nine Months Ended June 30,2021 | Nine Months Ended June 30,2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (7,406,240 | ) | $ | (437,511 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 89,098 | 86,443 | ||||||
| Stock based compensation | 97,463 | 12,228 | ||||||
| Stock options issued for services | – | 50,000 | ||||||
| Right of use of lease asset | 64,962 | – | ||||||
| Loss on impairment of Goodwill | 7,380,603 | – | ||||||
| Forgiveness of PPP loans | (661,045 | ) | – | |||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | 114,970 | 87,259 | ||||||
| Prepaid expenses and other current assets | (288,430 | ) | (168,835 | ) | ||||
| Accounts payable – trade | (73,976 | ) | (40,215 | ) | ||||
| Accrued expenses and other liabilities | 239,818 | 27,454 | ||||||
| Related Party Payable | (20,944 | ) | – | |||||
| Deferred revenue | (14,007 | ) | (24,664 | ) | ||||
| Deferred rent | 91,136 | – | ||||||
| Notes payable - current | 19,192 | – | ||||||
| Lease liability | (45,410 | ) | – | |||||
| Net cash provided by (used in) operating activities | (412,807 | ) | (407,842 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash acquired from Forta acquisition | – | 710,154 | ||||||
| Cash paid for purchase of property and equipment | (3,540 | ) | (829 | ) | ||||
| Net cash used in investing activities | (3,540 | ) | 709,325 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Borrowings from lines of credit | ||||||||
| Proceeds from notes payable | 422,900 | 283,614 | ||||||
| Payments on notes payable | (35,335 | ) | (11,893 | ) | ||||
| Payments on line of credit | (15,282 | ) | (4,935 | ) | ||||
| Proceeds from the sale of common stock | – | 25,000 | ||||||
| Net cash provided by financing activities | 372,283 | 291,786 | ||||||
| TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (44,064 | ) | 593,269 | |||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 482,854 | 36,053 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 438,790 | $ | 629,322 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 1,538 | $ | 5,624 | ||||
| Taxes | $ | – | $ | – | ||||
The accompanying notes are in integral par 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 2020, and by June 30, 2021 had in excess of $150,000,000 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.
TMN also provides 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 5) the Certified Tax Master® designation (which identifies members as offering special training not usually available to clients). TMN membership also includes the option to participate in 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 representatives in other states.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
A summary of the significant accounting policies 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.
| 7 |
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 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.
Noncash financing and investing activities on the Statement of Cash Flows includes $661,045 of debt forgiveness related to PPP loans for the three and nine months ended June 30, 2021.
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 June 30, 2021 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. This asset group also includes an accrued income asset, for Investment Management Fees, which are billed and collected in arrears. The Accrued Income balance as of June 30, 2021 is $285,175. This accounting is pursuant to recently revised accounting policies, which improve reporting accuracy, and as such, there are no prior meaningful comparative balances. The Company will report comparative balances when available.
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.
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 and nine Months ended June 30, 2021 and 2020, the Company recorded amortization expense of $16,364 and $16,320 for the three months, and $49,903 and $49,138 for the nine months, respectively, on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated amortization at June 30, 2021 was $426,598 and $377,505 at September 30, 2020.
| 8 |
Future amortization of proprietary content is estimated to be as follows for the years ended September 30:
| Schedule of future amortization | ||||
| 2021 | $ | 16,185 | ||
| 2022 | 64,740 | |||
| 2023 | 17,577 | |||
| Future amortization | $ | 98,502 |
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 June 30, 2021 and 2020, the Company recorded amortization expense of $0 and $1,308 respectively. During each of the nine months ended June 30, 2021 and 2020, the Company recorded amortization expense of $0 and $3,938 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 amortized and written off, at September 30, 2020.
Intellectual Property
The Company accounts for intellectual property in accordance with GAAP and accordingly, intellectual property is 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 has an indefinite life and does not consider the value of intellectual property recorded in the accompanying consolidated balance sheets to be impaired as of June 30, 2021 and September 30, 2020.
Goodwill
The Company conducts ongoing annual impairment assessments, 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 its carrying amount. The qualitative factors evaluated by the Company include: macroeconomic 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 its carrying amount, an impairment test is performed. Management determined, by assessing the qualitative factors, that it is more likely than not that the fair value of the Forta reporting unit is less than its carrying value and that the goodwill associated with the Forta reporting unit has been fully impaired. As such, Management has written off the full amount, $7,380,603, of the recorded goodwill associated with the Forta reporting unit as of June 30, 2021. The factors that Company considered included the loss of investment advisors to competitors or to retirement resulting in substantially reduced revenue and lowered prospects for growth, and the number of claims by former clients that will divert assets away from operations.
Goodwill consists of the following:
| Schedule of goodwill | ||||||||
|
June 30, 2021 |
September 30, 2020 |
|||||||
| TMN Goodwill | $ | 1,094,702 | $ | 1,094,702 | ||||
| Forta Goodwill | – | 7,380,603 | ||||||
| Total Goodwill | $ | 1,094,702 | $ | 8,475,305 | ||||
| 9 |
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 June 30, 2021 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 83,618,412 for the three and nine Months ended June 30, 2021, respectively, and 72,018,838 and 51,669,659 for the three and nine Months Ended June 30, 2020, respectively.
For the three and nine Months ended June 30, 2021, approximately 4,466,284 and 4,466,284, respectively, common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. For the three and nine Months Ended June 30, 2020, approximately 1,351,323 and 1,351,323, respectively, 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.
Investment management fees are recognized as services are provided by the Company through Forta. 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.
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.
| 10 |
Trade accounts receivable are carried only for investment management fees that are billed to and paid by customers. Currently the Company has the ability to pull all fees from the client accounts, and no trade accounts receivable are carried. Client fees due on accounts the Company can pull the fees from, are carried in Accrued Income. The allowance for doubtful accounts was $0 and $0 as of June 30, 2021 and 2020, respectively.
Sofos generates investment management fees for money management services and investment advisory services based upon assets under management. Revenue is recognized as earned, at the end of each month.
Forta generates commission revenue from the sale of securities, annuities and premiums on life insurance policies held by third parties. The revenue is recognized on a trade date basis for commissions on securities sales 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 for the nine months ended June 30, 2021 and 2020, respectively, $1,479,481 and $1,019,505, and for the three months ended June 30, 2021 and 2020, respectively, $554,152 and $243,622.
The Company received revenue from Forta’s operations for the nine months and three months ended June 30, 2021 including:
| Schedule of revenues from operations | ||||||||
| Investment Advisory fees | $ | 515,415 | $ | 1,422,745 | ||||
| Commission-based transactions | 244,470 | 767,284 | ||||||
| Insurance and Other Service Revenue | 45,753 | 114,570 | ||||||
| Other | – | – | ||||||
| Total Revenue | $ | 805,639 | $ | 2,304,598 |
The Company received revenue from TMN’s operations from the following major sources for the nine months and three months ended June 30:
| Schedule of revenues from operations | ||||||||||||||||
| Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| TMN membership subscriptions | $ | 205,871 | $ | 178,463 | $ | 653,467 | $ | 529,500 | ||||||||
| Tax Blueprints | 67,500 | 47,500 | 232,500 | 134,000 | ||||||||||||
| Commissions/Referrals and Other | 5,043 | 41,239 | 31,154 | 63,450 | ||||||||||||
| Total | $ | 278,415 | $ | 267,202 | $ | 917,121 | $ | 726,950 | ||||||||
| 11 |
The Company received revenue from MPath’s operations from insurance sales of $365,131 and $0 for the nine months ended June 30, 2021 and 2020, respectively, and $38,453 and $0 for the three months ended June 30, 2021 and 2020, respectively.
Advertising and Marketing
Marketing costs are charged to operations when incurred. Marketing expenses were $56,029 and $90,999 for the nine months ended June 30, 2021 and 2020, respectively, and $23,249 and $56,865 for the three months ended June 30, 2021 and 2020, respectively.
Stock-Based Compensation
For the three months ended June 30, 2021, the Company reported stock based compensation of $63,508, and for the nine months ended June 30, 2021 $183,751, respectively. For the three and nine months ended June 30, 2020 the Company reported stock based compensation of $50,885 and $67,136, respectively.
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.
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 10-K.
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.
| 12 |
For the nine months ended June 30, 2021, the Company reported $5,066,332 in revenue, a net loss of $7,406,240, which included the write off of Company’s goodwill related to the investment in Forta of $7,380,603, income recognized from the forgiveness of PPP loans of $661,045, net cash used in operations of $412,807 , cash used in financing activities of $288,762, purchases of assets of $3540, and an accumulated deficit of $14,397,029. These operating results raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
On February 2, 2021 Forta received a PPP loan in the amount of $422,900. This PPP loan bears a fixed interest rate of 1% over a five-year term, is guaranteed by the federal government, and does not require collateral. The loan may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loan will be eligible for forgiveness.
Company’s plans for expansion include attracting additional clients through marketing efforts with its current and future 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. 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.
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. Adoption of ASU 2017-04 does not have a material impact on the Company's financial condition or results of operations.
| 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 2020 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.
| 13 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 2020
| Segment Reporting | ||||||||||||||||||||||||
| FGC | Forta | MPath | Sofos | TMN | TOTAL | |||||||||||||||||||
| Income | ||||||||||||||||||||||||
| Broker Dealer | $ | – | $ | 151,569 | $ | – | $ | – | $ | – | $ | 151,569 | ||||||||||||
| Service Income | – | 10,737 | 30,133 | 11,380 | 267,202 | 319,452 | ||||||||||||||||||
| Investment Management Fees | – | 244,227 | – | 232,243 | – | 476,470 | ||||||||||||||||||
| Total Income | – | 406,533 | 30,133 | 243,622 | 267,202 | 947,491 | ||||||||||||||||||
| Expense | ||||||||||||||||||||||||
| Compensation Expense | 408,387 | 261,426 | – | 103,835 | 93,681 | 867,330 | ||||||||||||||||||
| Cost of services | – | 11,007 | – | – | 6,652 | 17,659 | ||||||||||||||||||
| Depreciation Amortization | 38,636 | – | – | – | – | 38,636 | ||||||||||||||||||
| General and Administrative | 62,817 | 82,884 | 2,244 | 17,440 | 2,698 | 168,084 | ||||||||||||||||||
| Marketing | 31,636 | 7,414 | – | 15,639 | 2,175 | 56,865 | ||||||||||||||||||
| Professional Services | 34,258 | 27,171 | – | 251 | – | 61,681 | ||||||||||||||||||
| Total Expense | 575,734 | 389,902 | 2,244 | 137,165 | 105,206 | 1,210,254 | ||||||||||||||||||
| Net Operating Income | (575,734 | ) | 16,631 | 27,889 | 106,458 | 161,996 | (262,763 | ) | ||||||||||||||||
| Other Income | (20,747 | ) | – | – | – | – | (20,747 | ) | ||||||||||||||||
| Total Other Income | (20,747 | ) | – | – | – | – | (20,747 | ) | ||||||||||||||||
| Other Expense | ||||||||||||||||||||||||
| Interest Expense | 12,341 | – | – | – | – | 12,341 | ||||||||||||||||||
| Income Taxes | – | – | – | – | – | – | ||||||||||||||||||
| Total Other Expense | 12,341 | – | – | – | – | 12,341 | ||||||||||||||||||
| Net Other Income/(Loss) | (8,406 | ) | – | – | – | – | (8,406 | ) | ||||||||||||||||
| Net Income/(Loss) | $ | (584,140 | ) | $ | 16,631 | $ | 27,889 | $ | 106,458 | $ | 161,996 | $ | (271,170 | ) | ||||||||||
| 14 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 2021
| FG Companies | Forta | Sofos | Mpath | TMN | TOTAL | |||||||||||||||||||
| Broker Dealer | $ | – | $ | 244,470 | $ | – | $ | – | $ | – | $ | 244,470 | ||||||||||||
| Service Income | – | 45,753 | 683 | 38,453 | 278,415 | 363,304 | ||||||||||||||||||
| Investment Management Fees | – | 515,415 | 553,469 | – | – | 1,068,884 | ||||||||||||||||||
| Total Income | – | 805,638 | 554,152 | 38,453 | 278,415 | 1,676,658 | ||||||||||||||||||
| Expense | ||||||||||||||||||||||||
| Compensation Expense | 484,310 | 723,069 | 219,200 | 10,850 | 98,500 | 1,535,929 | ||||||||||||||||||
| Cost of services | – | 18,310 | – | – | 10,856 | 29,166 | ||||||||||||||||||
| Depreciation & Amortization | 5,105 | 125 | – | – | 16,364 | 21,594 | ||||||||||||||||||
| General and Administrative | 119,793 | 190,687 | 4,462 | 7,386 | 19,695 | 342,023 | ||||||||||||||||||
| Marketing | 7,488 | 5,233 | – | 681 | 9,846 | 23,248 | ||||||||||||||||||
| Professional Services | 54,551 | 49,690 | 3,889 | – | 14,947 | 123,077 | ||||||||||||||||||
| Total Expense | 671,247 | 987,114 | 227,551 | 18,917 | 170,208 | 2,075,037 | ||||||||||||||||||
| Net Ordinary Income | (671,247 | ) | (181,476 | ) | 326,601 | 19,536 | 108,207 | (398,379 | ) | |||||||||||||||
| Other Income | ||||||||||||||||||||||||
| Loan Forgiveness | 283,345 | 377,700 | – | – | – | 661,045 | ||||||||||||||||||
| Total Other Income | 283,345 | 377,700 | – | – | – | 661,045 | ||||||||||||||||||
| Other Expense | ||||||||||||||||||||||||
| Interest Expense | 903 | 635 | – | – | – | 1,538 | ||||||||||||||||||
| Income Taxes | (64,562 | ) | 56,928 | – | – | – | (7,634 | ) | ||||||||||||||||
| Loss on impairment of Goodwill | 7,380,603 | – | – | – | – | 7,380,603 | ||||||||||||||||||
| Total Other Expense | 7,316,944 | 57,563 | – | – | – | 7,374,507 | ||||||||||||||||||
| Net Other Income | (7,033,599 | ) | 320,137 | – | – | – | (6,713,462 | ) | ||||||||||||||||
| Net Income/(Loss) | $ | (7,704,846 | ) | $ | 138,661 | $ | 326,601 | $ | 19,536 | $ | 108,207 | $ | (7,111,843 | ) | ||||||||||
| 15 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED JUNE 30, 2020
| FGC | FGT | Forta | MPath | Sofos | TMN | TOTAL | ||||||||||||||||||||||
| Income | ||||||||||||||||||||||||||||
| Broker Dealer | $ | – | $ | – | $ | 151,569 | $ | – | $ | – | $ | – | $ | 151,569 | ||||||||||||||
| Service Income | (3,263 | ) | 69,721 | 10,737 | 30,133 | 39,545 | 726,950 | 873,824 | ||||||||||||||||||||
| Investment Management Fees | – | – | 244,227 | – | 979,959 | – | 1,224,187 | |||||||||||||||||||||
| Total Income | (3,263 | ) | 69,721 | 406,533 | 30,133 | 1,019,505 | 726,950 | 2,249,580 | ||||||||||||||||||||
| Gross Profit | (3,263 | ) | 69,721 | 406,533 | 30,133 | 1,019,505 | 726,950 | 2,249,580 | ||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||
| Compensation Expense | 1,120,858 | (78 | ) | 261,426 | 1,972 | 385,049 | 245,186 | 2,014,413 | ||||||||||||||||||||
| Cost of services | – | 4,410 | 11,007 | – | – | 28,899 | 44,317 | |||||||||||||||||||||
| Depreciation Amortization | 72,094 | – | – | – | – | 14,350 | 86,443 | |||||||||||||||||||||
| General and Administrative | 211,992 | 1,620 | 82,884 | 2,655 | 25,235 | 23,772 | 348,158 | |||||||||||||||||||||
| Marketing | 54,899 | 2,411 | 7,414 | – | 20,158 | 6,117 | 90,999 | |||||||||||||||||||||
| Professional Services | 212,815 | – | 27,171 | – | 897 | 2,997 | 243,881 | |||||||||||||||||||||
| Total Expense | 1,672,658 | 8,363 | 389,903 | 4,627 | 431,339 | 321,320 | 2,828,211 | |||||||||||||||||||||
| Net Operating Income | (1,675,922 | ) | 61,358 | 16,631 | 25,506 | 588,166 | 405,630 | (578,631 | ) | |||||||||||||||||||
| Other Income | 129,253 | – | – | – | – | – | 129,253 | |||||||||||||||||||||
| Total Other Income | 129,800 | – | – | – | – | – | 129,800 | |||||||||||||||||||||
| Other Expense | ||||||||||||||||||||||||||||
| Interest Expense | 5,678 | – | – | – | – | (55 | ) | 5,624 | ||||||||||||||||||||
| Income Taxes | – | – | (14,123 | ) | – | – | – | (14,123 | ) | |||||||||||||||||||
| Total Other Expense | 5,678 | – | (14,123 | ) | – | – | (55 | ) | (8,500 | ) | ||||||||||||||||||
| Net Other Income/(Loss) | 124,122 | – | 14,123 | – | – | 55 | 138,300 | |||||||||||||||||||||
| Net Income/(Loss) | $ | (1,548,980 | ) | $ | 61,358 | $ | 30,754 | $ | 25,506 | $ | 588,166 | $ | 405,685 | $ | (437,511 | ) | ||||||||||||
| 16 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED JUNE 30, 2021
| FG Companies | Forta | Sofos | Mpath | TMN | TOTAL | |||||||||||||||||||
| Income | ||||||||||||||||||||||||
| Broker Dealer | $ | – | $ | 767,284 | $ | – | $ | – | $ | – | $ | 767,284 | ||||||||||||
| Service Income | – | 114,570 | 683 | 365,131 | 917,121 | 1,397,505 | ||||||||||||||||||
| Investment Management Fees | – | 1,422,745 | 1,478,798 | – | – | 2,901,543 | ||||||||||||||||||
| Total Income | – | 2,304,599 | 1,479,481 | 365,131 | 917,121 | 5,066,332 | ||||||||||||||||||
| Expense | ||||||||||||||||||||||||
| Compensation Expense | 1,389,281 | 1,959,331 | 531,973 | 96,311 | 294,500 | 4,271,396 | ||||||||||||||||||
| Cost of services | 0 | 45,846 | 11,074 | – | 30,476 | 87,396 | ||||||||||||||||||
| Depreciation & Amortization | 60,083 | 284 | – | – | 28,731 | 89,098 | ||||||||||||||||||
| General and Administrative | 201,983 | 569,240 | 16,670 | 16,707 | 91,839 | 896,439 | ||||||||||||||||||
| Marketing | 17,525 | 17,584 | 132 | 1,135 | 19,653 | 56,029 | ||||||||||||||||||
| Professional Services | 169,302 | 137,628 | 3,889 | 175 | 41,886 | 352,880 | ||||||||||||||||||
| Total Expense | 1,838,174 | 2,729,913 | 563,738 | 114,328 | 507,085 | 5,753,238 | ||||||||||||||||||
| Net Ordinary Income | (1,838,174 | ) | (425,314 | ) | 915,743 | 250,803 | 410,036 | (686,906 | ) | |||||||||||||||
| Other Income | ||||||||||||||||||||||||
| Loan Forgiveness | 283,345 | 377,700 | – | – | – | 661,045 | ||||||||||||||||||
| Total Other Income | 283,345 | 377,700 | – | – | – | 661,045 | ||||||||||||||||||
| 283,345 | 377,700 | – | – | – | 661,045 | |||||||||||||||||||
| Other Expense | ||||||||||||||||||||||||
| Interest Expense | 3,173 | 635 | – | – | – | 3,808 | ||||||||||||||||||
| Income Taxes | 199,820 | (203,854 | ) | – | – | – | (4,034 | ) | ||||||||||||||||
| Loss on impairment of Goodwill | 7,380,603 | – | – | – | – | 7,380,603 | ||||||||||||||||||
| Total Other Expense | 7,583,596 | (203,219 | ) | – | – | – | 7,380,377 | |||||||||||||||||
| Net Other Income | (7,300,251 | ) | 580,919 | – | – | – | (6,719,332 | ) | ||||||||||||||||
| Net Income/(Loss) | $ | (9,138,425 | ) | $ | 155,605 | $ | 915,743 | $ | 250,803 | $ | 410,036 | $ | (7,406,240 | ) | ||||||||||
| 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.
| 17 |
Assets Acquired and Liabilities Assumed
Forta Financial Group, Inc.
Assets Acquired and Liabilities Assumed
As of May 21, 2020
| Assets Acquired and Liabilities Assumed | ||||
| 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 |
| 5. | PROPERTY AND EQUIPMENT |
Property and equipment consist of the following at June 30:
| Schedule of property and equipment | ||||||||||
|
Estimated Service Lives |
June 30, 2021 |
September 30, 2020 |
||||||||
| Furniture, fixtures and equipment | 2 to 5 years | $ | 60,442 | $ | 407,580 | |||||
| Internally developed software | 5 years | 152,000 | 152,000 | |||||||
| 212,442 | 559,580 | |||||||||
| Less accumulated depreciation and amortization | (169,621 | ) | (477,868 | ) | ||||||
| $ | 42,821 | $ | 81,712 | |||||||
| 18 |
Depreciation expense was $5,230 and $21,009 for the three months ended June 30, 2021 and 2020, respectively. Depreciation expense was $47,775 and $33,367 during the nine months ended June 30, 2021 and 2020 respectively.
| 6. | INTELLECTUAL PROPERTY |
Intellectual property consists of the following:
| Schedule of intellectual property | ||||
| Intellectual property at September 30, 2020 | $ | 53,170 | ||
| Intellectual property purchased at cost | – | |||
| Intellectual property at June 30, 2021 | $ | 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 2020, the FASB issued ASU No. 2020-1 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.
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 Company rent expense for the three months ended June 30, 2021 and 2020 respectively was $106,543, and $59,115. Total Company rent expense for the nine months ended June 30, 2021 and 2020, respectively was $241,168 and $123,703. The rent expense for the three and nine months ended June 30, 2021 include a final settlement of the termination of the Allen lease, of $66,000. The Forta lease for its Greenwood Village premises was renegotiated. 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.
| 19 |
Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows:
| 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 $38,830 and $54,112 at June 30, 2021 and September 30, 2020, respectively.
| 9. | NOTES PAYABLE |
On April 19, 2020, 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 June 30, 2021 and September 30, 2020, were $18,897 and $23,534 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. The balance at June 30, 2021 and September 30, 2020 were $40,494 and $52,000, respectively.
On February 2, 2021 Forta received a PPP loan in the amount of $422,900. This PPP loan bears a fixed interest rate of 1% over a five-year term, are guaranteed by the federal government, and does not require collateral. The loan may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loans will be eligible for forgiveness, which would result in an increase in capital.
Two PPP loans received in May 2020 were forgiven in April 2021, $283,345, and in June 2021, $377,700, resulting in income from those forgivenesses.
| 20 |
The Company’s maturities of debt subsequent to June 30, 2021 are as follows:
| Schedule of debt maturities | ||||
| 2021 | $ | 254,238 | ||
| 2022 | 217,611 | |||
| 2023 | 10,442 | |||
| Total debt | $ | 482,291 |
| 10. | ACCRUED EXPENSES |
Accrued expenses increased by $225,359 for the nine months ending June 30, 2021 to $1,292,751 from $1,067,392 as of September 30, 2020. Accrued expenses consist of the following at June 30:
| Schedule of accrued expenses | ||||||||
| 30-Jun-21 | 30-Sep-20 | |||||||
| SAR Liability | $ | 154,567 | $ | 31,793 | ||||
| Accrued payroll | 138,096 | 105,458 | ||||||
| Commissions payable | 80,586 | 16,783 | ||||||
| State Tax liability | 0 | 3,165 | ||||||
| Federal Tax liability | 0 | 3,355 | ||||||
| Credit Cards | (401 | ) | 12,798 | |||||
| Other Accounts payable | 765,117 | 699,117 | ||||||
| Accrued operating expenses | 97,345 | 194,923 | ||||||
| Accrued E&O liability | 82,752 | – | ||||||
| Total accrued expenses | $ | 1,318,062 | $ | 1,067,392 | ||||
| 11. | INCOME TAXES |
For the three months ending June 30, 2021 and 2020, 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, 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.
| 21 |
The deferred tax assets and liabilities in the accompanying consolidated balance sheets include the following components at June 30, 2021 and September 30, 2020:
| 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.
Forta has 16 pending FINRA claims that arise from the sale to clients of alternative investments (REITs, Business Development Loan Funds, and Oil and Gas securities). Most of the claims arise from investments prior 2015. None of the registered representatives that recommended these alternative investments is currently associated with Forta. The total amount of the pending claims is in excess of $3,000,000 and the Company is in the process of determining the best approach to respond to the claims. Based on the status of the claims with FINRA, management cannot reasonably estimate a potential range of losses or settlements of the claims. Forta is evaluating how best to resolve the claims. Forta no longer generates significant revenue from brokerage activity like the sale of alternative investments and the continuing need for a broker dealer will be evaluated by Company.
In December 2020, 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. While the economy has reopened, the Delta variant may impact the Company. 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.
| 22 |
Any significant shutdown of the economy for a sustained period will affect the Company’s revenue which could lead to losses.
| 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 nine months ended June 30, 2021 the Company sold 0 shares, for $0 and during the nine months Ended June 30, 2020, respectively, the Company sold 75,757, for $25,000.
| 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.
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 0.834%, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40% in 2020 and 87.67% in 2021. SAR awards 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.
Stock option and stock appreciation rights activity is summarized as follows:
| Schedule of option activity | ||||||||||||||
| 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 | 81 months | |||||||||
| Granted | 5,600,000 | 1,361,200 | $ | 0.23 | 108 months | |||||||||
| Exercised | (116,375 | ) | (13,850 | ) | $ | 0.09 | 87 months | |||||||
| Canceled or expired | (1,299,405 | ) | (1,845,870 | ) | $ | 0.27 | ||||||||
| Outstanding - September 30, 2020 | 6,972,696 | 51,935 | $ | 0.17 | 100 months | |||||||||
| Granted | 187,500 | 45,956 | $ | 0.25 | 118 months | |||||||||
| Exercised | – | – | $ | – | ||||||||||
| Canceled or expired | – | – | $ | – | ||||||||||
| Outstanding - June 30, 2021 | 7,160,196 | 97,891 | $ | 0.23 | 98 months | |||||||||
| Exercisable - June 30, 2021 | 2,693,912 | $ | 0.25 | 85 months | ||||||||||
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Unamortized share-based compensation expense as of June 30, 2021 amounted to $382,874 which is expected to be recognized over the next 4.3068 years.
Total compensation expense, included in salaries and wages, of previously unamortized stock compensation for the three months ended June 30, 2021 and 2020 was $54,034 and $50,885, respectively, and for the nine months ended June 30, 2021 and 2020, respectively, was $158,184 and $67,136.
On November 27, 2019, the 2016 Plan was amended to allow grants of other equity related rights, including Stock Appreciation Rights. During the three and nine months ended June 30, 2021, 0 and 0 options and SARs were granted, respectively.
| 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 was $49,500 and $49,500 for the three months ended June 30,2021 and 2020 respectively, and $148,500 and $148,500 for the nine months ended June 30, 2021 and 2020 respectively.
On April 12, 2020, 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, 2020. The balance of the loan at June 30, 2021 was $5,259 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 March 1, 2021 Company entered into a merger agreement with NCW Group, Inc. The consummation of the merger was completed in July of 2021 and Company issued 8,000,000 shares of its common stock in exchange for 100% ownership of the NCW Group, Inc. The owners of the two companies and some staff have become employees of Company , and NCW has ceased to exist.
The number of FINRA claims against Forta has increased to 22 as of August 2021. The claims that arise from the sale to clients of alternative investments (REITs, Business Development Loan Funds, and Oil and Gas securities). Most of the claims arise from investments prior 2015. None of the registered representatives that recommended these alternative investments is currently associated with Forta. The total amount of the pending claims is in excess of $3,000,000 and the Company is in the process of determining the best approach to respond to the claims. Based on the status of the claims with FINRA, management cannot reasonably estimate a potential range of losses or settlements of the claims. Forta is evaluating how best to resolve the claims. Forta no longer generates significant revenue from brokerage activity like the sale of alternative investments and the continuing need for a broker dealer will be evaluated by Company.
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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 nine months ended June 30, 2021.
Plan of Operations
Financial Gravity is a parent company of financial services companies including brokerage, financial advisor services and wealth management, insurance, estate planning, family office services, risk management, business and personal tax planning, and business consulting. Financial Gravity's mission is to bring together companies and services that will deliver a complete financial services experience to our clients.
Financial Gravity’s Subsidiaries:
Forta Financial Group, Inc.
Forta is a securities broker dealer, a registered investment advisor and a licensed insurance agency. Forta is a registered investment advisor with the Securities and Exchange Commission (''SEC") and with a registered broker-dealer 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, 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 June 30, 2021, the Forta’s net capital was $220,583 and the aggregate indebtedness to net capital was 114.29%. 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.
Sofos is a Registered Investment Advisory firm. Sofos manages investment portfolios and is a registered investment advisor engaged in financial planning and wealth management and is registered either with the Securities and Exchange Commission “SEC” or state securities authorities.
MPath Advisor Resources, LLC (“MPath”) MPath is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.
Tax Master Network, LLC
Tax Master Network (“TMN”) supports over 300 CPAs and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. Company believes that TMN customer base adds significant business development opportunities in the investment advisory area. The Company developed the Certified Tax Master® for this group and rolled out new client systems and client acquisition systems. TMN also provides tax services through its “Tax Blueprint®” system which identifies several strategies for lowering the client's taxes.
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Results of Operations for the three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020
Revenues
For the nine months ended June 30, 2021, revenue increased $2,816,752 to $5,066,332 from $2,249,580 for the nine months ended June 30, 2020. The principal components of the increase in revenue are: revenue of approximately $1,900,000 from Forta, increased investment management revenue from Sofos of approximately $458,000, and increased revenue from TMN of approximately 190,000, and from Mpath of approximately $365,000, offset by decreased revenue at Financial Gravity Tax of approximately $70,000 as compared to the nine months ended June 30, 2020.
For the three months ended June 30, 2021, revenue increased $735,835 to $1,676,659 from $947,491 for the three months Ended June 30, 2020. The principal components of the increase in revenue are: revenue of approximately $400,000 from Forta, increased investment management revenue from Sofos of approximately $321,000, and increased revenue from TMN of approximately 11,000, and from Mpath of approximately $38,000.
Operating Expenses
Cost of services activity increased $11,507 to $29,166 for the three months ended June 30, 2021 from $17,659 for the three months ended June 30, 2020. The three month increase consists of an increase in Forta clearing house charges of $7,000, and an increase in TMN credit card processing charges of approximately $4,000, due to increased membership. Cost of services activity increased $42,613 to $87,396 for the nine months ended June 30, 2021 from $44,317 for the nine months Ended June 30, 2020. The nine month increase is principally due to an increase in Forta clearing house charges of approximately $34,000 and a Sofos customer settlement of $11,073. The cost of services is credit card processing fees and Forta cost of brokerage services.
Professional services expenses include legal expenses , professional fees, and business consulting. Professional services expenses increased $61,396 to $123,077 for the three months ended June 30, 2021 from $61,681 for the three months ended June 30, 2020 This increase is primarily due to an increase in legal fees and accounting arising from Forta operations. Professional services expenses increased $118,000 to $352,881 for the nine months ended June 30, 2021 from $243,881 for the nine months Ended June 30, 2020 This increase is primarily due to an increase in legal fees and accounting arising from Forta operations.
Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $17,042 to $21,594 for the three months ended June 30, 2021 from $38,636 for the three months ended June 30, 2020. The decrease is due to a significant number of assets becoming fully depreciated. Depreciation and amortization expenses increased $2,655 to $89,098 for the nine months ended June 30, 2021 from $86,443 for the nine months Ended June 30, 2020.
General and administrative expenses increased $175,677 to $342,023 for the three months ended June 30, 2021 from $168,084 for the three months ended June 30, 2020. The increase is primarily due to a final rent settlement on the termination of the Allen lease, of $66,000, and increase of Forta's expenses of approximately $108,000 for the period, and an increase in TMN G&A of $17,000. General and administrative expenses increased $548,280 to $896,438 for the nine months ended June 30, 2021 from $348,158 for the nine months Ended June 30, 2020. The drivers of the increase are the same categories as in the three month increases.
Marketing expenses decreased by $33,166 to $23,249 for the three months ended June 30, 2021 from $56,865 for the three months ended June 30, 2020 Marketing expenses decreased by $34,970 to $56,029 for the nine months ended June 30, 2021 from $90,999 for the nine months Ended June 30, 2020. The decreases are due to the Company shutting down some previous marketing channels, while new channels have yet to be identified and implemented.
Compensation expenses increased $643,033 to $1,510,363 for the three months ended June 30, 2021 from $867,330 for the three months ended June 30, 2020. The three month increase is principally due to an increase in commissions of approximately $350,000, an increase in FGC compensation of approximately $55,000 and an increase in Forta non-commission compensation of approximately, $205,000. Compensation expenses increased $2,231,416 to $4,271,396 for the nine months ended June 30, 2021 from $2,014,413 for the nine months Ended June 30, 2020. The increase is principally comprised of an increase in commissions, $1,240,000, increased Forta non-commission compensation, $740,000, and an increase in FGC compensation $150,000.
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The Company experienced an increase in its net loss of $6,845,684 to a net loss of $7,111,843 for the three months ended June 30, 2021 from a net loss of $266,159 for the three months ended June 30, 2020. The Company experienced an increase in its net loss of $6,968,728 to a net loss of $7,406,240 for the nine months ended June 30, 2021 from a net loss of $437,512 for the nine months Ended June 30, 2020. The changes are primarily attributable to loan forgiveness on PPP loans, in combination with the reasons noted above.
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 sold, 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 has been recognized in 2021 in the amount of $76,470, that was included in the contract liability at the beginning of the at the end of 2020.
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Services income is recognized as consulting and other professional services are performed by the Company. Income is recognized as services are delivered.
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.
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%, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40% in 2020 and is based on risk-free rate of 0.834%, dividend yield of 0%, expected life of 10 years and volatility of 87.68% in 2021. SAR awards are being treated as a liability award while the options are being treated as equity awards. While the fair value of the options are based on the Black Scholes assumptions included here, the SAR awards are based on assumptions at period end and are treated as liability awards. Forfeitures are recorded as they occur.
Liquidity and Capital Resources
As of June 30, 2021, the Company had cash and cash equivalents of $435,040. The decrease of $194,282 in cash and cash equivalents from September 30, 2020 was due to net cash provided by operating activities of $98,019 net cash used in investing activities of $3,540, and net cash used in operations of $412,807.
As shown below, at June 30, 2021, our contractual cash obligations totaled approximately $799,227, all of which consisted of debt principal and lease obligations.
Maturities by years
| Contractual obligations | Less than 1 year | 1-3 years | Total | |||||||||
| Notes payable | $ | 254,238 | $ | 228,053 | $ | 482,291 | ||||||
| Lease liability | 83,432 | 170,044 | 253,476 | |||||||||
| Line of Credit | 38,830 | – | 38,830 | |||||||||
| Total contractual cash obligations | $ | 385,417 | $ | 413,811 | $ | 799,227 | ||||||
| 28 |
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand.
For the nine months ended June 30, 2021, the Company reported $5,066,332 in revenue, a net loss of $7,406,240, net cash used in operations of $412,807, and an accumulated deficit of $14,397,029. These operating results raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
In in February of 2021, Forta received a PPP loan of $422,900. The loan may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loan will be eligible for forgiveness, which would result in an increase in capital of $422,900.
Company’s plans for expansion include attracting additional clients through marketing efforts with its current and future brokerage, investment management and insurance agent representatives, as well as increasing the TMN membership and the investment advisory activity of the members to increase assets under management and Company’s revenue. Future growth plans will include efforts to increase advisory 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 7 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 June 30, 2021 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.
| 29 |
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 June 30, 2021. In making this assessment, its management used the criteria based on the framework in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2021, its internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles. The Company’s Chief Executive Officer and Chief Financial Officer reviewed the results of their assessment with its board of directors.
Based on its evaluation under this framework, management concluded that its internal control over financial reporting was not effective as of the evaluation date due to the factors stated below.
| • | Insufficient Resources: The Company has inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting to be able to have appropriately designed and operating entity level controls including risk assessment; information and communication; monitoring; and financial reporting. | |
| • | Inadequate Segregation of Duties: The Company has inadequate number of personnel to properly segregate duties to implement control procedures. |
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
No changes in Internal Control over Financial Reporting have been made since fiscal year end 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. As indicated in the Subsequent Events the number of FINRA claims against Forta has increased to 22 as of August 2021. The claims arise from the sale to clients of alternative investments (REITs, Business Development Loan Funds, and Oil and Gas securities). Most of the claims arise from investments prior 2015. None of the registered representatives that recommended these alternative investments is currently associated with Forta. The total amount of the pending claims is in excess of $3,000,000 and the Company is in the process of determining the best approach to respond to the claims. Based on the status of the claims with FINRA, management cannot reasonably estimate a potential range of losses or settlements of the claims. Forta is evaluating how best to resolve the claims. Forta no longer generates significant revenue from brokerage activity like the sale of alternative investments and the continuing need for a broker dealer will be evaluated by Company.
Item 1A. RISK FACTORS.
Forta has 20 pending FINRA claims that arise from the sale to clients of alternative investments (REITs, Business Development Loan Funds, and Oil and Gas securities). These income generating investments did not do as well as the stock markets, and the performance has lagged the market. While the exposure on these cases would not be material, the costs of defense for legal fees may be substantial. Company is evaluating the impact upon operations of the expenses.
In December 2020, 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.7 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. While the economy has reopened, the Delta variant may impact the Company. 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 | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101) |
| 32 |
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: August 27, 2021 | By: /s/ Scott Winters |
| Scott Winters | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: August 27, 2021 | By: /s/ Todd Oligino |
| Todd Oligino | |
| 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 | August 27, 2021 | |
| Scott Winters | (principal executive officer) | ||
| /s/ Todd Oligino | CFO | August 27, 2021 | |
| Todd Oligino | (principal financial officer) | ||
| /s/ John Pollock | Co-Chairman, EVP | August 27, 2021 | |
| John Pollock | |||
| /s/ Edward A. Lyon | Director | August 27, 2021 | |
| Edward A. Lyon | |||
| /s/ Jennifer Winters | Director | August 27, 2021 | |
| Jennifer Winters | |||
| /s/ William R. Nelson | Director | August 27, 2021 | |
| William R. Nelson | |||
| 33 |
1 Year Financial Gravity Compan... (PK) Chart |
1 Month Financial Gravity Compan... (PK) Chart |
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