UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the three and nine months ended
OR
For the transition period from __________ to __________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(Commission File No.) |
(IRS Employee Identification No.) |
(Address of Principal Executive Offices)
(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.
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).
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 ☐ | |
| 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 ☐
The number of shares outstanding of the registrant’s Common Stock as of August __, 2022 was .
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
June 30, 2022 (Unaudited) | September 30, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accrued revenues | ||||||||
| Current right-of-use asset | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Proprietary content, net | ||||||||
| Intellectual property | ||||||||
| Right-of-use asset, net of current portion | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable - trade | $ | $ | ||||||
| Accrued expenses | ||||||||
| Related party payables | ||||||||
| Contract liabilities | ||||||||
| Line of credit | ||||||||
| Rent payable | ||||||||
| Lease payable, current portion | ||||||||
| Notes payable, current portion | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Lease payable | ||||||||
| Notes payable | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies (see Note 10) | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Common stock, $ par value; shares authorized; shares issued and outstanding as of June 30, 2022, and as of September 30, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
The accompanying notes are an 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, 2022 and 2021
(Unaudited)
| For the Three Months Ending | For the Nine Months Ending | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| REVENUE | ||||||||||||||||
| Broker dealer income | $ | $ | $ | $ | ||||||||||||
| Investment management fee | ||||||||||||||||
| Service income | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Affiliate expense | ( | ) | ( | ) | ||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Cost of services | ||||||||||||||||
| Professional services | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Marketing | ||||||||||||||||
| Compensation | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Forgiveness of PPP Loan | ||||||||||||||||
| Loss on impairment of Goodwill | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| TOTAL OTHER INCOME (EXPENSE), NET | ( | ) | ( | ) | ||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME (LOSS) | ( | ) | ( | ) | ( | ) | ||||||||||
| BASIC NET INCOME (LOSS) PER SHARE | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the three month and nine-month periods ended June 30, 2022 and 2021
(Unaudited)
| Total | ||||||||||||||||||||
| Common Stock | Additional | Accumulated | Stockholders' | |||||||||||||||||
| No. of Shares | Amount | Paid-in Capital | Deficit | Equity | ||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based employee compensation expense | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at December 31, 2020 | ( | ) | ||||||||||||||||||
| Stock-based employee compensation expense | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2021 | ( | ) | ||||||||||||||||||
| Stock-based employee compensation expense | – | ( | ) | ( | ) | |||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based employee compensation expense | – | |||||||||||||||||||
| Shares issued in lieu of rent | ||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at December 31, 2021 | ( | ) | ||||||||||||||||||
| Stock-based employee compensation expense | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2022 | ( | ) | ||||||||||||||||||
| Stock-based employee compensation expense | – | |||||||||||||||||||
| Net income | – | |||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
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, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock-based compensation | ||||||||
| Non-cash rent expense | ||||||||
| Loss on impairment of Goodwill | ||||||||
| Forgiveness of PPP loans | ( | ) | ( | ) | ||||
| Changes in Assets and Liabilities: | ||||||||
| Accrued revenues | ||||||||
| Right-of-use asset | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable – trade | ( | ) | ( | ) | ||||
| Accrued expenses | ||||||||
| Related party payables | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Rent payable | ( | ) | ||||||
| Lease payable | ( | ) | ( | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Sale of property and equipment | ||||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from notes payable | ||||||||
| Payments on notes payable | ( | ) | ( | ) | ||||
| Proceeds from line of credit | ||||||||
| Payments on line of credit | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | ( | ) | ||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the period: | ||||||||
| Interest | $ | $ | ||||||
| Income tax | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
Financial Gravity Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Financial Gravity Companies, Inc., and Subsidiaries (the “Company”) are located in Lakeway, Texas. Operations are conducted through wholly owned subsidiaries. The Company supports investment advisors and provides tax professionals with a turnkey family office charter. The Company helps the tax professionals evolve from the commoditized business of tax compliance to a Family Office Director that runs and manages their own multi-family office. Family Office Directors are able to leverage the Financial Gravity systems, technology, proprietary resources, and deep domain expertise to bring an elevated and holistic financial service experience to their clients that spans proactive tax planning, retirement and estate planning, wealth management, and risk mitigation.
Tax Master Network, LLC (“TMN”) services a network of over 300 accountants and tax preparers with three primary services including monthly subscriptions to the tax software systems, coaching and email marketing services. Financial Gravity Family Office Services, LLC (“FGFOS”) is a registered investment advisor (“RIA”) that offers investment management advice to clients through independent investment advisors. Many of the independent investment advisors are members of TMN that are licensed to provide investment management advice. FGFOS provides support for the multi-family offices run by the TMN members.
Financial Gravity Enhanced Markets, LLC (“FGEM”) is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.
Financial Gravity Asset Management, Inc. (“FGAM”) is an RIA. FGAM provides asset management services.
Financial Gravity Investment Services, LLC (“FGIS”) is an Office of Supervisory Jurisdiction that is affiliated with Kingswood U.S., a broker dealer. FGIS will have a small number of registered representatives for securities transactions that require a broker/dealer affiliation.
Forta Financial Group, Inc. (“Forta”) has ended its broker/dealer and RIA operations and has no current operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting polices consistently applied in the preparation of the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is as follows.
Basis of Consolidation
The consolidated financial statements include the accounts of Financial Gravity Companies, FGAM, FGEM, TMN. FGIS, FGFOS and Forta (collectively referred to as the “Company”). All significant intercompany accounts and transactions have been eliminated on consolidation.
Reclassifications to Prior Period Financial Statements and Adjustments
Certain items from prior reporting periods were
reclassified in the financial statements for the current year presentation. These do not have a material impact on the consolidated balance
sheets, statements of operations, or statements of cash flow. For instance, an adjustment has been made to the accompanying consolidated
statements of cash flows changing the classification of approximately $
| 7 |
These changes in classification does not affect previously reported operating activities or financial position of the Company.
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 several 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.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist of expenses the Company has paid for prior to the service or good being provided. These prepaid expenses will be recorded as expense at the time the service has been provided.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to earnings over their estimated service lives by the straight-line method.
Maintenance and repairs are charged to expenses 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 $
Future amortization of proprietary content is estimated to be as follows for the years ended September 30:
| 2022 | $ | |||
| 2023 | ||||
| Future amortization | $ |
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 is not amortized but is 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, 2022 and September 30, 2021.
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 it is carrying amount, an impairment test is performed. Management determined that no impairment was necessary at June 30, 2022.
| 8 |
Goodwill consists of the following:
June 30, 2022 | September 30, 2021 | |||||||
| TMN Goodwill | $ | $ | ||||||
| Company Goodwill | ||||||||
| Total Goodwill | $ | $ | ||||||
Income Taxes
The Company accounts for federal and state income taxes pursuant to GAAP, 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 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 were no uncertain tax positions or accrued interest or penalties as of June 30, 2022 and September 30, 2021.
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 income tax returns since 2019 are still subject to examination by taxing authorities.
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 was and for the three and nine months ended June 30, 2022 and for the three and nine months ended June 30, 2021.
For the three and nine months ended June 30, 2022, approximately 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, 2021, approximately common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive.
Revenue Recognition
The Company derives its revenues primarily from the following activities: Investment Management Fees, Securities Brokerage Commissions, Tax Master Network subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales.
Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments. Fees are generally paid monthly in arrears. Revenues are earned over the period in which the service is provided.
The Company generates services revenue which is recognized when consulting and other professional services are performed by the Company (primarily from TMN and FGEM). Revenue is recognized as services are delivered.
The Company generates subscription revenue primarily from TMN. Revenue is recognized as services are delivered.
| 9 |
Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as contract liabilities in the accompanying consolidated balance sheets.
Accrued revenues are recorded for investment management
fees that are paid in arrears and are generally collected within a few days of month end by debiting client accounts held by a custodian.
The allowance for doubtful accounts was $
FGAM and FGFOS generate investment management fees for services provided by the Company to clients. Investment management fees include fees earned from assets under management by providing professional services to manage client investments. Revenue is recognized as earned and billed at the end of each monthly period. FGAM shares certain clients with FGFOS and the professional fees charges to the FGFOS client accounts is treated as affiliate expense to FGAM and revenue to FGFOS.
FGIS generates commission revenue from the sale of securities and annuities and premiums on life insurance policies. The revenue is recognized when commissions are earned, or when it is determined that annuities or insurance products are sold, which is typically at the trade date. Commissions are collected after products are sold, issued or in force.
FGEM generates revenue from insurance marketing services for insurance agents, including sourcing of insurance policies through selling agreements. Revenue is recognized when the policies have been accepted by the issuer and it is probable the commission will be received.
Tax Master Network provides 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 strategy guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay a fixed fee based on TMN's estimate of potential future savings. A contract liability is recognized when the customer payment is received. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement.
The Company received revenue from FGAM’s
operations that are primarily from investment management fees, including money management fees. Investment management fees are based upon
a percentage of assets under management and totaled $
The Company received revenue from Forta’s
operations that totaled approximately $
The Company received service revenue from TMN’s
operations of $
The Company received revenue from FGEM’s
operations from insurance sales of approximately $
The Company received revenue from FGIS’s
operations in the amount of $
Advertising and Marketing
Marketing costs are charged to operations when
incurred. Marketing expenses were approximately $
| 10 |
The Company includes in Compensation all salaries, wages, employee benefits, payroll costs, payroll taxes, commissions to employees and to independent investment advisors and related party consultants, and stock-based compensation. This is a reclassification from prior periods’ salary and wages on the consolidated statements of operations.
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 % in the quarter ended June 30, 2022 and % in 2021, dividend yield of %, expected life of years and volatility of % in 2022 and % to % in 2021 respectively. 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.
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 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, 2021, 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.
For the three months ended June 30, 2022, the
Company reported approximately $1,347,000 in revenue, a net operating loss of approximately $
The 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 the Company’s revenue. Future growth plans will include efforts to increase advisory headcount through recruiting of individual advisors and groups of advisors. There is no guaranty that the Company will achieve these objectives.
| 11 |
Recent Accounting Pronouncements
In November of 2021, the FASB issued ASU 2021-10 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.
3. SEGMENT REPORTING
We manage our business in 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, Company has determined that Forta will underperform and has decided to end its operations, which is in progress.
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 2021
| FGC | Forta | FGAM (Sofos) | FGEM (MPath) | TMN | TOTAL | |||||||||||||||||||
| Income | ||||||||||||||||||||||||
| Broker Dealer | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Investment Management Fees | ||||||||||||||||||||||||
| Service Income | ||||||||||||||||||||||||
| Total Revenue | ||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||
| Cost of services | ||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||
| Total Expense | ||||||||||||||||||||||||
| Net Operating Income (Loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Other Income | ||||||||||||||||||||||||
| PPP Loan forgiveness | ||||||||||||||||||||||||
| Total Other Income | ||||||||||||||||||||||||
| Other Expense | ||||||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Income tax revenue (expense) | ( | ) | ||||||||||||||||||||||
| Loss on impairment of Goodwill | ( | ) | ( | ) | ||||||||||||||||||||
| Net Other Expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Net Income/(Loss) | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | ||||||||||||||
| 12 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 2022
| Eliminations | FGC | Forta | FGAM (Sofos) | FGFOS | FGEM (MPath) | TMN | FGIS | TOTAL | ||||||||||||||||||||||||||||
| Income | ||||||||||||||||||||||||||||||||||||
| Broker Dealer | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Investment Management Fees | ( | ) | ||||||||||||||||||||||||||||||||||
| Service Income | ||||||||||||||||||||||||||||||||||||
| Income from investment in subsidiaries | ( | ) | ||||||||||||||||||||||||||||||||||
| Total Revenue | ( | ) | ||||||||||||||||||||||||||||||||||
| Affiliate expense | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||||||||||
| Cost of services | ||||||||||||||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||||||||||||
| General and administrative | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||||||||||||||
| Total Expense | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Operating Income (Loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other Income | ||||||||||||||||||||||||||||||||||||
| PPP Loan forgiveness | ||||||||||||||||||||||||||||||||||||
| Total Other Income | ||||||||||||||||||||||||||||||||||||
| Other Expense | ||||||||||||||||||||||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Income Taxes | ||||||||||||||||||||||||||||||||||||
| Net Other Expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net Income/(Loss) | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| 13 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED JUNE 30, 2021
| Eliminations | FGC | Forta | FGAM (Sofos) | FGEM (MPath) | TMN | TOTAL | ||||||||||||||||||||||
| Income | ||||||||||||||||||||||||||||
| Broker Dealer | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Investment Management Fees | ||||||||||||||||||||||||||||
| Service Income | ||||||||||||||||||||||||||||
| Total Revenue | ||||||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||
| Cost of services | ||||||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||||||
| Total Expense | ||||||||||||||||||||||||||||
| Net Operating Income (Loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Other Income | ||||||||||||||||||||||||||||
| PPP Loan forgiveness | ||||||||||||||||||||||||||||
| Total Other Income | ||||||||||||||||||||||||||||
| Other Expense | ||||||||||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Income tax revenue (expense) | ( | ) | ||||||||||||||||||||||||||
| Loss on impairment of Goodwill | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net Other Expense | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net Income/(Loss) | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | |||||||||||||||||
| 14 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED JUNE 30, 2022
| Eliminations | FGC | Forta | FGAM (Sofos) | FGFOS | FGEM (MPath) | TMN | FGIS | TOTAL | ||||||||||||||||||||||||||||
| Income | ||||||||||||||||||||||||||||||||||||
| Broker Dealer | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Investment Management Fees | ( | ) | ||||||||||||||||||||||||||||||||||
| Service Income | ||||||||||||||||||||||||||||||||||||
| Income from investment in subsidiaries | ( | ) | ||||||||||||||||||||||||||||||||||
| Total Revenue | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Affiliate expense | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||||||||||
| Cost of services | ( | ) | ||||||||||||||||||||||||||||||||||
| Professional services | ( | ) | ||||||||||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||||||||||||
| General and administrative | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||||||||||||||
| Total Expense | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Operating Income (Loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other Income | ||||||||||||||||||||||||||||||||||||
| PPP Loan forgiveness | ||||||||||||||||||||||||||||||||||||
| Total Other Income | ||||||||||||||||||||||||||||||||||||
| Other Expense | ||||||||||||||||||||||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Income Taxes | ||||||||||||||||||||||||||||||||||||
| Net Other Expense | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net Income/(Loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | $ | $ | ( | ) | |||||||||||||||||||
| 15 |
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
| Estimated Service Lives | June 30, 2022 | September 30, 2021 | ||||||||
| Furniture, fixtures, and equipment | $ | $ | ||||||||
| Internally developed software | ||||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
Depreciation expenses was $
| Intellectual property consists of the following: | ||||
| Intellectual property at September 30, 2021 | $ | |||
| Intellectual property purchased at cost | ||||
| Intellectual property at June 30, 2022 | $ | |||
5. LEASES
The Company leases their office space through an operating lease in
Lakeway, Texas and Carmel, California, and an office lease in Cincinnati, Ohio. The Company had a lease in Denver with a lease term into
2024 and deferred for some past due lease obligations over the amended lease term, but that leased property has been tendered back to
the landlord. The Company still carries $
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.
Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows:
| Rental Payments | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total undiscounted lease payments | ||||
| Less imputed interest | ( | ) | ||
| Present value of lease payments | $ | |||
The weighted average discount rate is
The Company incurred lease expense for its operating leases of $24,637 and $33,151 during the three and nine months ended June 30, 2022 and $102,784 and $241,167 during the three and nine months ended June 30, 2021 which was included in “General and administrative” expense on the accompanying consolidated statements of operations. Included in lease expense in fiscal year 2021 was unpaid rent of $66,000 which was relieved by the issuance of stock in lieu of unpaid rent in the amount of $66,000 during the nine months ended 2022.
| 16 |
6. LINE OF CREDIT
The Company has a revolving line of credit with Wells Fargo Bank, N.A.
in the amount of $
7. NOTES PAYABLE
On April 19, 2019, the Company entered into an
unsecured Promissory Note Payable with Charles O’Banon, a customer, in the amount of $
On August 31, 2021, 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 $
On February 2, 2021, Forta received a PPP loan
in the amount of $
The Company’s maturities of debt subsequent to June 30, 2022 are as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total Debt maturities | $ |
8. ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 2022 and as of September 30, 2021:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| SAR liability | $ | $ | ||||||
| Accrued payroll | ||||||||
| Commissions payable | ||||||||
| Accrued expenses | ||||||||
| Other accounts payable - unissued stock | ||||||||
| Accrued operating expenses | $ | $ | ||||||
| 17 |
9. INCOME TAXES
For the nine-months ending June 30, 2022 and 2021, the effective
tax rate of
A deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit in the accompanying consolidated statements of operations are the result of changes in the assets and liabilities for deferred taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount for any tax benefits that, based on available evidence, are not expected to be realized. Income tax expense is the current tax payable or refundable for the year plus or minus the net change in the deferred tax assets and liabilities. Deferred income taxes of the Company arise from the temporary differences between financial statement and income tax recognition of NOL carry-forwards.
The deferred tax assets and liabilities in the accompanying consolidated balance sheets include the following components at June 30, 2022 and September 30, 2021:
| Net non-current deferred tax assets: | June 30, 2022 | September 30, 2021 | ||||||
| Net operating loss carryforward | $ | $ | ||||||
| Amortization | ( | ) | ( | ) | ||||
| Depreciation | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred taxes | $ | $ | ||||||
10. 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.
In December 2021, a new variant of the novel strain of coronavirus, referred to as COVID-19, spread to the United States. The financial markets may demonstrate volatility in reaction to the virus outbreak. Strain on companies in many sectors of the economy continue. It is unclear when these strains will end, and the lingering effects are not known. During periods of high volatility and uncertainty many investors choose to stop ongoing investment activity and sit on the sidelines until the markets become more stable. The Company’s revenues are adversely affected when investors reduce their investment activities. In addition, part of Company’s revenues is based upon the value of assets under management. If the investment portfolios of clients decrease in value, the fees charged for investment advice also decreases. The Company could be affected by lack of access to its offices, although that seems to have had little short-term impact as employees have succeeded in maintaining productivity while working remotely. The long-term effects, however, may present significant issues.
Any significant shutdown of the economy for a sustained period will affect the Company’s revenue which could lead to losses.
11. STOCKHOLDERS’ EQUITY
Common Stock
The Company is authorized to issue up to shares of common stock, par value $ per share.
| 18 |
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 . 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, stock appreciation rights (SARs), and other forms of equity grants. The maximum number of shares of stock that may be issued pursuant to the exercise of options under the 2016 Plan is . 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.
| Shares under Option Plan | Value of Shares under Option Plan | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |||||||||||
| Outstanding - September 30, 2021 | $ | months | ||||||||||||
| Granted | months | |||||||||||||
| Exercised | ||||||||||||||
| Canceled or expired | ( | ) | ( | ) | ||||||||||
| Outstanding - June 30, 2022 | months | |||||||||||||
| Exercisable - June 30, 2022 | months | |||||||||||||
Unamortized share-based compensation was $ and $ at June 30, 2022 and 2021, respectively, and will be recognized over the next 7.9 years. During the nine months ended June 30, 2022 and 2021, and options and SARs were granted, respectively. 60,866 in SAR grants have a participation price that was always above the market value and therefore there is no current value. SARs are recorded as a liability because there is a cash settlement option.
13. RELATED PARTY TRANSACTIONS
Included in compensation expenses for TMN were consulting fees paid
to a related party as a condition to the TMN acquisition. One agreement is with Tax Tuneup, LLC which is owned by Ed Lyon, the CEO of
TMN. Through this arrangement, Tax Tuneup, LLC provides consulting services to TMN, including updating of the tax strategies to comply
with tax law and rules. The payments each month are $16,500. The total paid under this agreement in the nine months ended June 30, 2022
and 2021, respectively, was $
On
Executives of the Company have elected to forego
a portion of their compensation. Company recognizes the compensation as an expense and the obligation as deferred compensation. As of
June 30, 2022, the amount of that deferred compensation obligation is approximately $
14. SUBSEQUENT EVENTS
As of the date of this report there were no subsequent events which required recognition, adjustment to, or disclosure in the accompanying consolidated financial statements.
| 19 |
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 (“MDA”) is intended to help you understand its historical results of operations during the periods presented and its financial condition. This MDA should be read in conjunction with its financial statements and the accompanying notes and contains forward-looking statements that involve risks and uncertainties and assumptions that could cause its actual results to differ materially from management’s expectations. See the sections entitled “Forward-Looking Statements” and “Risk Factors” included in this Form 10-Q for the nine months ended June 30, 2022.
Plan of Operations
Financial Gravity Companies, Inc. and Subsidiaries (the “Company”) located in Lakeway Texas. Operations are conducted through wholly owned subsidiaries. Company supports investment advisors and provides tax professionals with a turnkey family office charter. Company helps the tax professionals evolve from the commoditized business of tax compliance to a Family Office Director that runs and manages their own multi-family office. Family Office Directors are able to leverage the Financial Gravity systems, technology, proprietary resources, and deep domain expertise to bring an elevated and holistic financial service experience to their clients that spans proactive tax planning, retirement and estate planning, wealth management, and risk mitigation.
Financial Gravity’s Subsidiaries:
Financial Gravity Asset Management, Inc. (“FGAM”), is an RIA, registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses. FGAM had in excess of $100,000,000 in assets under management as of June 30, 2022.
Financial Gravity Enhanced Markets, LLC (“FGEM”) is an insurance marketing organization and provides insurance products and services to insurance agents or agencies. The advisors with FGFOS access insurance and other related products through FGEM.
Tax Master Network (“TMN”) supports over 300 CPA and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. TMN member customer base adds significant business development opportunities for Company. TMN provides tax services, including its “Tax Blueprint®” system which identifies strategies for lowering the client's taxes. This presents Company with the opportunity to provide enhanced tax advice and investment advisory services.
Financial Gravity Family Office Services, LLC (“FGFOS”) is an RIA that offers financial planning, and wealth management services to clients through investment advisors. Many of the independent investment advisors are members of TMN that are licensed to provide investment management advice. FGFOS provides support for the multi-family offices run by the TMN members.
Financial Gravity Investment Services, LLC (“FGIS”) is an office of Office of Supervisory Jurisdiction that is affiliated with Kingswood U.S., a broker dealer. FGIS will have a small number of registered representatives for securities transactions that require a broker/dealer affiliation.
Forta Financial Group, Inc. (“Forta”) has discontinued its broker/dealer and RIA operations.
Growth comes from the following activities:
Tax services and financial advisory services, including Tax Blueprint® services through TMN, as well as investment advisory services by TMN subscribers to their clients through Family Office Services. Family Office Services include wealth management services through FGFOS, investment advisory services through FGAM, insurance services through FGEM, and stock brokerage services through FGIS.
| 20 |
Results of Operations for the three and nine months ended June 30, 2022 compared to the three and nine months ended June 30, 2021
Revenues
For the three months ended June 30, 2022, revenue decreased approximately $330,000 to approximately $1,347,000 from approximately $1,677,000 for the three months ended June 30, 2021. The principal components of the decrease in revenue are: reduction of revenue of approximately $770,000 from winding down of Forta, an increase of revenue from FGFOS of approximately $553,000, decreases in revenue for FGAM and TMN of approximately $218,000, and minor changes in other units as compared to the three months ended June 30, 2021. For the nine months ended June 30, 2022, revenue decreased approximately $548,000 to approximately $4,518,000 from $5,066,000 for the nine months ended June 30, 2021. The principal components of the decrease in revenue are: decrease in revenue of approximately $2,026,000 from winding down of Forta, decreased investment management revenue from FGAM of approximately $283,000, and increase in revenue from FGFOS of approximately $1,272,000, an increase from insurance sales from FGEM of approximately $443,000, and minor changes on other operating units as compared to the nine months ended June 30, 2021.
Operating Expenses
Compensation expense decreased approximately $340,000 to approximately $1,195,000 for the three months ended June 30, 2022 from approximately $1,535,000 for the three months ended June 30, 2021. The decrease was principally due to a decrease at Forta as it winds down ($541,457) and the increased salary and commission expense at FGCO (approximately $281,000) and FGFOS ($166,978) and other smaller amounts at the other operating units. Compensation expense decreased approximately $405,000 to approximately $3,865,000 for the nine months ended June 30, 2022 from approximately $4,271,000 for the nine months ended June 30, 2021. The decrease was principally due to a decrease at Forta as it winds down (approximately $1,035,000) and the increased salary and commission expense at FGCO (approximately $581,000) and FGFOS (approximately $351,000) and other smaller amounts at the other operating units.
Cost of services activity decreased approximately $19,500 to approximately $9,500 for the three months ended June 30, 2022 from approximately $29,000 for the three months ended June 30, 2021. Cost of services activity increased approximately $215,000 to approximately $302,000 for the nine months ended June 30, 2022 from $87,000 for the nine months ended June 30, 2021. The three and nine-month increases consist primarily of Forta's custodian's termination charge of $250,000.
Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses increased approximately $14,000 to approximately $108,000 for the three months ended June 30, 2022 from approximately $123,000 for the three months ended June 30, 2021. This increase is primarily due to an increase in legal fees and accounting arising from Forta operations. Professional services expenses decreased approximately $24,000 to approximately $328,000 for the nine months ended June 30, 2022 from approximately $353,000 for the nine months ended June 30, 2021 This increase is primarily due to small increases in legal fees and accounting arising from FGCO and Forta operations.
Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses stayed flat to approximately $22,000 for the three months ended June 30, 2022 from $22,000 for the three months ended June 30, 2021. Depreciation and amortization expenses decreased approximately $24,000 to approximately $65.000 for the nine months ended June 30, 2022 from $89,000 for the nine months ended June 30, 2021. The decrease is due to deceleration of depreciation of certain assets.
General and administrative expenses decreased approximately $220,000 to approximately $120,000 for the three months ended June 30, 2022 from approximately $340,000 for the three months ended June 30, 2021. The decrease is primarily due to the wind down of Forta. General and administrative expenses decreased approximately $507,000 to approximately $389,000 for the nine months ended June 30, 2022 from approximately $896,000 for the nine months ended June 30, 2021. The decrease is primarily due to the winding down of Forta ($340,000 in reductions), and smaller changes in overhead at the other operating units including: (FGCO - approximately $98,000 in increases, and TMN - approximately $65,000 in decreases).
| 21 |
Marketing expenses stayed flat at approximately $23,000 for the three months ended June 30, 2022 from approximately $23,000 for the three months ended June 30, 2021. Marketing expenses increased by approximately $35,000 to approximately $91,000 for the nine months ended June 30, 2022 from approximately $56,000 for the nine months ended June 30, 2021. The increases are due to the Company spending more in marketing channels.
The Company experienced a decrease in its net loss of approximately $7,100,000 to a net profit of approximately $47,000 for the three months ended June 30, 2022 from a net loss of approximately $7,112,000 for the three months ended June 30, 2021. The Company experienced a decrease in its net loss of approximately $6,980,000 to a net loss of approximately $425,000 for the nine months ended June 30, 2022 from a net loss of $7,406,000 for the nine months ended June 30, 2021. The changes are primarily attributable to the reasons noted above, and PPP Loan forgiveness, and no write off of goodwill in 2022.
Significant Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements.
Use of Estimates and Assumptions.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition and Accounts Receivable.
The Company derives its revenues primarily from the following activities: Investment Management Fees, Securities Brokerage Commissions, Tax Master Network subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales.
Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments. Fees are generally paid quarterly, in advance, for each quarter or monthly in arrears. Revenues are earned over the period in which the service is provided, which is typically monthly.
The Company generates services income which is recognized when consulting and other professional services are performed by the Company (primarily from TMN and FGEM). Income is recognized as services are delivered.
Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as contract liabilities in the accompanying consolidated balance sheets.
Accrued revenues are recorded for investment management fees that are paid in arrears. The allowance for doubtful accounts was $0 and $0 as of June 30, 2022 and September 30, 2021, respectively.
In the normal course of business, the Company extends credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
FGAM, FGFOS and Forta generated investment management fees for services provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage client investments. Revenue is recognized as earned, at the end of each monthly period.
| 22 |
FGIS and Forta generated commission revenue from the sale of securities and annuities and premiums on life insurance policies. The revenue is recognized when commissions are earned, or when it is determined that annuities or insurance products are sold, which is typically at trade date. Commissions are received after products are sold, issued or in force.
FGEM generates revenue from insurance marketing services for insurance agents, including sourcing of insurance policies through selling agreements. Revenue is recognized when the policies have been accepted by the issuer and it is probable the commission will be received.
Tax Master Network provides network subscription services to its TMN members that are charged and collected on a month-to-month basis. None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are tax planning strategies guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay a fixed fee based on TMN's estimate of potential future savings. A contract liability is recognized when the customer payment is received. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement.
Trade deferred revenue is carried only for subscription revenues not received in the period they apply to. The allowance for doubtful accounts was $0 and $0 as of June 30, 2022 and September 30, 2021 respectively.
In the normal course of business, the Company extends credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
Stock-Based Compensation.
The Company recognizes the fair value of stock-based compensation awards as Compensation in the accompanying statements of operations for employee grants, commissions for non-employee grants, and stock appreciation rights grants, on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rate of 0.59% in the quarter ended June 30, 2022, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40% in 2021. SAR awards are new this year and are being treated as a liability award while the options are being treated as equity awards. While the fair value of the options are based on the Black Scholes assumptions included here, the SAR awards are based on assumptions at period end and are treated as liability awards. Forfeitures are recorded as they occur.
Liquidity and Capital Resources
As of June 30, 2022, the Company had cash and cash equivalents of $208,000. Cash decreased during the nine months ending June 30, 2022 by approximately $98,000, primarily due to cash used in operations.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand.
For the nine months ended June 30, 2022, the Company reported $3,171,235 in revenue, a net loss of $425,740, a decrease of cash of $98,100, and an accumulated deficit of $14,839,611. These operating results raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
| 23 |
On February 2, 2021, Forta received a PPP loan in the amount of $422,900. This PPP loan bears a fixed interest rate of 1% over a five-year term, is guaranteed by the federal government, and does not require collateral. The SBA has informed Forta that $339,070 of the outstanding principle is eligible for forgiveness. Forta is evaluating the SBA’s conclusion.
Company’s plans for expansion include attracting additional clients through marketing efforts with its current and future brokerage, investment management and insurance agent representatives, as well as increasing the TMN membership. Future growth plans will include efforts to increase tax and investment advisory activity through TMN members. There is no guaranty that the Company will achieve these objectives.
Off Balance Sheet Transactions and Related Matters
There are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our business is sensitive to fluctuations in interest rates. Any significant increase in interest rates could have a material adverse effect on certain revenue generating transactions which may affect Company’s ability to continue as a going concern.
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 June 30, 2022. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on its evaluation, management concluded as of June 30, 2022 that its disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, described below in Management’s Report on Internal Control Over Financial Reporting. Notwithstanding the identified material weaknesses, management believes the financial statements included in this Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. The Company’s Chief Executive Officer and Chief Financial Officer assessed the effectiveness of its internal control over financial reporting as of June 30, 2022. In making this assessment, its management used the criteria based on the framework in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2022, its internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles. The Company’s Chief Executive Officer and Chief Financial Officer reviewed the results of their assessment with its board of directors.
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Based on its evaluation under this framework, management concluded that its internal control over financial reporting was not effective as of the evaluation date due to the factors stated below.
Insufficient Resources: The Company has inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting to be able to have appropriately designed and operating entity level controls including risk assessment; information and communication; monitoring; and financial reporting.
Inadequate Segregation of Duties: The Company has inadequate number of personnel to properly segregate duties to implement control procedures.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
No changes in Internal Control over Financial Reporting have been made since fiscal year end 2021.
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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 that would affect the Company’s operations. A subsidiary of the Company is currently involved in one legal proceeding. Company does not believe that the outcome of any pending litigation will be material to our ability to operate or market our services, our consolidated financial position, results of operations or cash flows.
Item 1A. RISK FACTORS.
Except as described below, no changes from September 30, 2021 10-K annual report.
In late March of 2022, one of Company’s larger investment advisors terminated the relationship with FGAM. The loss of this advisor could result in a reduction of revenue to the Company of over $25,000 per month after commissions to the advisor. Company is taking steps to address the effects of this termination.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None
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) |
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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 15, 2022 | By: /s/ Scott Winters |
| Scott Winters | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: August 15, 2022 | By: /s/ Gary Nemer |
| Gary Nemer | |
| 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 15, 2022 | |
| Scott Winters | (principal executive officer) | ||
| /s/ Gary Nemer | CFO | August 15, 2022 | |
| Gary Nemer | (principal financial officer) | ||
| /s/ John Pollock | Co-Chairman, EVP | August 15, 2022 | |
| John Pollock | |||
| /s/ Edward A. Lyon | Director | August 15, 2022 | |
| Edward A. Lyon | |||
| /s/ Jennifer Winters | Director | August 15, 2022 | |
| Jennifer Winters | |||
| /s/ William R. Nelson | Director | August 15, 2022 | |
| William R. Nelson | |||
| /s/ Mark Williams | Director | August 15, 2022 | |
| Mark Williams |
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