UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the three 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
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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. ☐
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The number of shares outstanding of the registrant’s Common Stock as of February 14, 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
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accrued revenues | ||||||||
| Current right to use lease | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| OTHER ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Proprietary content, net | ||||||||
| Intellectual Property | ||||||||
| Right to Use Lease | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable – trade | $ | $ | ||||||
| Accrued expenses | ||||||||
| Related Party Payables | ||||||||
| Contract Liabilities | ||||||||
| Line of credit | ||||||||
| Rent Payable | ||||||||
| Lease Payable | ||||||||
| Notes payable | ||||||||
| Total current liabilities | ||||||||
| NOTES PAYABLE | ||||||||
| Lease Payable | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value; shares authorized; shares issued and outstanding as of December 31, 2021 and shares issued and outstanding 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 ended December 31, 2021 and 2020
(Unaudited)
For the Three Months Ended December 31, 2021 | For the Three Months Ended December 31, 2020 | |||||||
| REVENUE | ||||||||
| Broker Dealer Income | $ | $ | ||||||
| Investment management fees | ||||||||
| Service income | ||||||||
| Total revenue | ||||||||
| OPERATING EXPENSES | ||||||||
| Cost of services | ||||||||
| Professional services | ||||||||
| Depreciation and amortization | ||||||||
| General and administrative | ||||||||
| Marketing | ||||||||
| Salaries and wages | ||||||||
| Total operating expenses | ||||||||
| Net operating loss | ( | ) | ( | ) | ||||
| OTHER EXPENSE | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total other expense | ( | ) | ( | ) | ||||
| Net Loss before Income taxes | ( | ) | ( | ) | ||||
| Income Taxes | ( | ) | ||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| LOSS PER SHARE - Basic and Diluted | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the three-month periods ended December 31, 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, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock based employee compensation expense | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock based employee compensation expense | – | |||||||||||||||||||
| Shares issued in lieu of rent | ||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ |
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31,
(Unaudited)
Three Months Ended December 31, 2021 | Three Months Ended December 31, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | ( | ) | ||||||
| Accounts receivable - related party | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accrued Income | ( | ) | ||||||
| Accounts payable – trade | ( | ) | ( | ) | ||||
| Accrued expenses and other liabilities | ||||||||
| Related Party Payable | ( | ) | ||||||
| Contract Liabilities | ||||||||
| Right of use of lease asset | ||||||||
| Deferred Rent | ( | ) | ||||||
| Lease liability | ( | ) | ||||||
| Net cash provided by operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for purchase of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments on notes payable | ( | ) | ( | ) | ||||
| Payments on line of credit | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| TOTAL INCREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| Noncash Investing/Financing: | ||||||||
| Issuance of Stock for lease liability | $ | 66,000 | $ | – | ||||
| Obligations incurred under operating lease | $ | 162,367 | $ | – | ||||
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”) located in Austin, Texas. Operations are conducted through wholly owned subsidiaries: Company, along with its subsidiary companies, supports investment advisors and provides tax professionals with a turnkey family office charter. Company helps the tax professionals evolve from the commoditized business of tax compliance to a Family Office Director that runs and manages their own multi-family office. Family Office Directors are able to leverage the Financial Gravity systems, technology, proprietary resources, and deep domain expertise to bring an elevated and holistic financial service experience to their clients that spans proactive tax planning, retirement and estate planning, wealth management, and risk mitigation.
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 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, formerly MPath Advisors Resources, LLC (“FGEM”) is an insurance marketing organization and provides insurance products and services to insurance agents or agencies.
Financial Gravity Asset Management, Inc., formerly Sofos Investment Management, Inc. (“FGAM”) is a registered investment advisor. FGAM provides asset management services.
Forta Financial Group, Inc. is a securities broker-dealer, a registered investment advisor and a licensed insurance agency. The Company previously decided to end Forta’s broker/dealer operations and is in the process of completing that transition.
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.
| 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.
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.
| 7 |
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 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 $
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 are stated at cost. Intellectual property with indefinite lives are not amortized but are tested for impairment at least annually. Management has determined that the intellectual property have an indefinite life and do not consider the value of intellectual property recorded in the accompanying consolidated balance sheets to be impaired as of December 31, 2021 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, a two-step impairment test is performed. Management determined that no impairment was necessary at December 31, 2021.
| 8 |
Goodwill consists of the following:
| December 31, 2021 | September 30, 2021 | |||||||
| TMN Goodwill | $ | $ | ||||||
| Company Goodwill (Net NCW Transaction) | ||||||||
| Company Goodwill (Forta Transaction) | ||||||||
| 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 (“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 were no uncertain tax positions or accrued interest or penalties as of December 31, 2021 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 returns since 2017 are still subject for 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 were and for the three months ended December 31, 2021 and 2020, respectively.
For the three months ended December 31, 2021, approximately common stock equivalents were not added to the diluted average shares because inclusion of such equivalents would be antidilutive. For the three months ended December 31, 2020, 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, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales.
Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments. Fees are generally paid quarterly, in advance, for each quarter or monthly in arrears. Revenues are earned over the period in which the service is provided, which is typically monthly.
| 9 |
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 $
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 generates 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, at the end of each monthly period.
Forta and FGIS generate commission revenue from the sale of securities and annuities and premiums on life insurance policies. The revenue is recognized when commissions are earned, or when it is determined that annuities or insurance products are sold, which is typically at the trade date. Commissions are received after products are sold, issued or in force.
FGEM generates revenue from insurance marketing services for insurance agents, including sourcing of insurance policies through selling agreements. Revenue is recognized when the policies have been accepted by the issuer and it is probable the commission will be received.
Tax Master Network has five levels of network subscription services that are charged and collected on a month-to-month basis. None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are tax planning strategies guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings. A contract liability is recognized when the customer payment is received. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement.
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 for the three months ended December 31:
| 2021 | 2020 | |||||||
| Investment Advisory fees | $ | $ | ||||||
| Commission-based transactions | ||||||||
| Insurance and Other Service Revenue | ||||||||
| Total Revenue | $ | |||||||
| 10 |
The Company received revenue from TMN’s operations from the following major sources for the three months ended December 31:
| 2021 | 2020 | |||||||
| TMN membership subscriptions | $ | $ | ||||||
| Tax Blueprints | ||||||||
| Commissions/Referrals | ||||||||
| Total | $ | $ | ||||||
The Company received revenue from FGEM’s operations from insurance
sales of $
Advertising and Marketing
Marketing costs are charged to operations when incurred. Marketing
expenses were $
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 December 31, 2021 and .% in 2020, dividend yield of %, expected life of years and volatility of % in 2021 and % to % in 2020 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 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, 2021, included in its Annual Report on Form 10-K.
| 11 |
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand.
For the three months ended December 31, 2021, the Company reported
$
On May 8, 2020, the Company received a PPP loan in the amount of $
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 individual advisors and groups of advisors. There is no guaranty that the Company will achieve these objectives.
Future Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses, which amends how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, which applies to trade accounts receivable and the calculation of the allowance for uncollectible accounts receivable. The new standard will become effective for the Company for fiscal years beginning after December 31, 2020, with early adoption permitted. In November of 2020, the FASB issued ASU 2020-10 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. The new guidance is effective for the Company beginning October 1, 2023. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on the Company's financial condition or results of operations.
| 12 |
| 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 DECEMBER 31, 2020
| Income | Eliminations | FGC | Forta | FGEM | FGAM | TMN | TOTAL | |||||||||||||||||||||
| Broker Dealer | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Service Income | ||||||||||||||||||||||||||||
| Investment Management Fees | ||||||||||||||||||||||||||||
| Income from Inv in Subsidiaries | ( | ) | ||||||||||||||||||||||||||
| Total Income | ( | ) | ||||||||||||||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||
| Compensation Expense | ||||||||||||||||||||||||||||
| Cost of services | ||||||||||||||||||||||||||||
| Depreciation Amortization | ||||||||||||||||||||||||||||
| General and Administrative | ||||||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||||
| Professional Services | ||||||||||||||||||||||||||||
| Total Expense | ||||||||||||||||||||||||||||
| Net Operating Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Other Income/Expense | ||||||||||||||||||||||||||||
| Total Other Expense | ||||||||||||||||||||||||||||
| Net Other Income | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net Income/(Loss) | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | |||||||||||||||||
| 13 |
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED DECEMBER 31, 2021
| Income | Eliminations | FGC | Forta | FGAM | FGFOS | FGEM | TMN | FGIS | TOTAL | |||||||||||||||||||||||||||
| Broker Dealer | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Service Income | ||||||||||||||||||||||||||||||||||||
| Investment Management Fees | ||||||||||||||||||||||||||||||||||||
| Income from Inv in Subsidiaries | ( | ) | ||||||||||||||||||||||||||||||||||
| Total Income | ( | ) | ||||||||||||||||||||||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||||||||||
| Compensation Expense | ||||||||||||||||||||||||||||||||||||
| Cost of services | ( | ) | ||||||||||||||||||||||||||||||||||
| Depreciation Amortization | ||||||||||||||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||||||||||||
| Professional Services | ||||||||||||||||||||||||||||||||||||
| General and Administrative | ||||||||||||||||||||||||||||||||||||
| Total Expense | ||||||||||||||||||||||||||||||||||||
| Net Operating Income | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other Income/Expense | ||||||||||||||||||||||||||||||||||||
| Total Other Expense | ||||||||||||||||||||||||||||||||||||
| Net Income/(Loss) | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | $ | $ | ( | ) | |||||||||||||||||||||
| 4. | PROPERTY AND EQUIPMENT |
Property and equipment consist of the following at December 31:
| Estimated Service Lives | 30-Dec-2021 | 30-Sep-2021 | ||||||||
| Furniture, fixtures and equipment | $ | $ | ||||||||
| Internally developed software | ||||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
| 14 |
Depreciation expense was $
| INTELLECTUAL PROPERTY | ||||
| Intellectual property consists of the following: | ||||
| Intellectual property at September 30, 2021 | $ | |||
| Intellectual property purchased at cost | ||||
| Intellectual property at December 31 2021 | $ | |||
| 5. | LEASES |
The Company leases their office space through an operating lease in
Lakeway, Texas and Carmel, California, and non-material offices leases in Cincinnati, Ohio. The Company had a lease in Denver lease agreement
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. A gain of $
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.
Company assumed an existing lease in Carmel CA upon the merger with
NCW/Vestus. The lease runs through June 2023. The total rent expense for the Carmel lease was $11,250 for the three months ended December
31, 2021. There are renewal options at the end of this lease. At this time, renewal is uncertain. A discount rate of
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 | ||||
| 2027 | ||||
| Total Rental payments | ||||
| Interest | ||||
| Net Rental payments | $ | |||
The weighted average discount rate is
| 15 |
| 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 (“O’Banon”), a customer, in the amount of $
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 $
On February 2, 2021, Forta received a PPP loan in the amount of $
The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the proceeds of the PPP loans will be eligible for forgiveness. However, Forta will end its operation and will be dissolved.
The Company’s maturities of debt subsequent to December 31, 2021 are as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total Debt maturities | $ |
| 16 |
| 8. | ACCRUED EXPENSES |
Accrued expenses increased by $54,101 for the three months ending December 31, 2021 to $1,137,080 from $1,082,979 as of September 30, 2021. Accrued expenses consist of the following at December 31:
| Schedule of accrued expenses | ||||||||
| December 31, 2021 | September 30, 2021 | |||||||
| SAR Liability | $ | 93,554 | $ | 61,763 | ||||
| Accrued payroll | 142,898 | 42,858 | ||||||
| Commissions payable | 100,642 | 80,588 | ||||||
| Assurance and tax fees | 52,500 | 90,000 | ||||||
| TBP Commissions | 1,250 | – | ||||||
| Credit card processing fees | 2,909 | 2,909 | ||||||
| Accrued Tech costs | 44,208 | 39,743 | ||||||
| Other Accounts payable | 699,117 | 765,117 | ||||||
| Accrued operating expenses | $ | 1,137,080 | $ | 1,082,979 | ||||
| 9. | INCOME TAXES |
For
the three months ending December 31, 2021 and 2020, 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 December 31, 2021 and September 30, 2021:
| December 31, 2021 | September 30, 2021 | |||||||
| Net non-current deferred tax assets: | ||||||||
| Net operating loss carryforward | $ | $ | ||||||
| Amortization | ( | ) | ( | ) | ||||
| Depreciation | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred taxes | $ | $ | ||||||
| 17 |
| 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, has spread to the United States.
The financial markets may demonstrate volatility in reaction to the virus outbreak. There has been considerable strain on companies in many sectors of the economy. Investors suffered significant decreases in the value of their investment portfolios, and the economy has significantly shut down. It is unclear when the economy will start up again, and the lingering effects are not known. During periods of high volatility and uncertainty many investors choose to stop ongoing investment activity and sit on the sidelines until the markets become more stable.
The Company’s revenues are adversely affected when investors reduce their investment activities. In addition, part of Company’s revenues is based upon the value of assets under management. If the investment portfolios of clients decrease in value, the fees charged for investment advice also decreases.
The Company could be affected by lack of access to its offices, although that seems to have had little short-term impact as employees have succeeded in maintaining productivity while working remotely. The long-term effects, however, may present significant issues.
Any significant shutdown of the economy for a sustained period will affect the Company’s revenue which could lead to losses.
| 11. | STOCKHOLDERS’ EQUITY |
Common Stock
The Company is authorized to issue up to shares of common stock, par value $ per share.
| 12. | 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 . 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.
| 18 |
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 . 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 | Value of Shares under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |||||||||||||
| Outstanding - September 30, 2021 | $ | $ | months | |||||||||||||
| Granted | $ | $ | months | |||||||||||||
| Exercised | $ | $ | ||||||||||||||
| Canceled or expired | ( | ) | $ | $ | ||||||||||||
| Outstanding - December 31, 2021 | months | |||||||||||||||
| Exercisable - December 31, 2021 | $ | months | ||||||||||||||
Unamortized share-based compensation expense as of December 31, 2021 amounted to $ which is expected to be recognized over the next 5 years.
Total compensation expense, included in salaries and wages, of previously unamortized stock compensation was $ and $ for the three months ended December 31, 2021 and 2020.
On November 27, 2020, the 2016 Plan was amended to allow grants of
other equity related rights, including Stock Appreciation Rights. During the three months ended December 31, 2021,
| 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 three months ended
December 31, 2021 and 2020 respectively, were $
On
| 14. | SUBSEQUENT EVENTS |
In January 2022, Forta’s clearing firm sent a notice of termination, and has assessed a termination fee of $250,000 as per its contractual right. Forta does not have the resources to pay the termination fee, and the clearing firm will apply all cash balances that it holds to the payment of the termination fee. That will result in the transfer of in excess of $100,000 from Forta to the clearing firm and increase liabilities in the net amount of approximately $150,000. In addition, Forta has violated its net capital requirements with FINRA and Forta has shut down its broker dealer operations. Forta’s application to terminate its FINRA registration was accepted in January, retroactive to October 2020. Management is considering dissolving Forta, and that decision will likely be made next fiscal quarter.
| 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 three months ended December 31, 2021.
Plan of Operations
Financial Gravity Companies, Inc. (the “Company”) is headquartered in Lakeway Texas, with locations in Monterey, California and Cincinnati, Ohio. Company, along with its subsidiary companies, supports investment advisors and provides tax professionals with a turnkey family office charter. Company helps the tax professionals evolve from the commoditized business of tax compliance to a Family Office Director that runs and manages their own multi-family office. Family Office Directors are able to leverage the Financial Gravity systems, technology, proprietary resources, and deep domain expertise to bring an elevated and holistic financial service experience to their clients that spans proactive tax planning, retirement and estate planning, wealth management, and risk mitigation.
Financial Gravity’s Subsidiaries:
Financial Gravity Asset Management, Inc., formerly Sofos Investment Management, Inc. (“FGAM”), is an RIA, registered with the Securities and Exchange Commission, and provides asset management services to individuals and businesses. FGAM had in excess of $170,000,000 in assets under management as of December 31, 2021.
Financial Gravity Enhanced Markets, LLC, formerly, MPath Advisor Resources, LLC (“FGEM”) is an insurance marketing organization and provides insurance products and services to insurance agents or agencies. The advisors with FGFOS access insurance and other related products through FGEM.
Tax Master Network (“TMN”) supports over 300 CPA and Enrolled Agent professionals, training them to add crucial tax planning services to support clients. TMN member customer base adds significant business development opportunities for Company. TMN provides tax services, including its “Tax Blueprint®” system which identifies strategies for lowering the client's taxes. This presents Company with the opportunity to provide enhanced tax advice and investment advisory services.
| 20 |
Financial Gravity Family Office Services, LLC (“FGFOS”) is a registered investment advisor (“RIA”) that offers financial planning, and wealth management services to clients through investment advisors. Many of the independent investment advisors are members of TMN that are licensed to provide investment management advice. FGFOS provides support for the multi-family offices run by the TMN members.
Financial Gravity Investment Services, LLC (“FGIS”) is an office of Office of Supervisory Jurisdiction that is affiliated with Kingswood U.S., a broker dealer. FGIS will have a small number of registered representatives for securities transactions that require a broker/dealer affiliation.
Forta Financial Group, Inc. (“Forta”) is a broker-dealer, a registered investment advisor, and a licensed insurance agent. It primarily operates in Colorado. As part of its annual review of the performance of its subsidiaries, Company has decided to discontinue Forta’s broker/dealer operations, and is in the process of completing that transition.
Growth comes from the following reportable segments:
Tax services and financial advisory services, including Tax Blueprint® and Tax Operating System® services through TMN, as well as investment advisory services by TMN subscribers to their clients through FGFOS.
Family Office Services including wealth management services through FGFOS, investment advisory services through FGAM, insurance services through FGEM, and stock brokerage services through FGIS.
Results of Operations for the three months ended December 31, 2021 compared to the three months ended December 31, 2020
Revenues
For the three months ended December 31, 2021, revenue decreased $111,784 to 1,595,893 from $1,707,677 for the three months ended December 31, 2020. The principal components of the decrease in revenue are: decreased revenue of approximately $604,000 from Forta, increased investment management revenue from FGAM of approximately $91,000, decreased revenue from TMN of approximately $111,000, and increased revenue from FGEM of approximately $143,000 as compared to the three months ended December 31, 2020, and one time revenue from FGIS of $30,000 for referral fees.
Operating Expenses
Cost of services activity decreased $16,765 to $18,782 for the three months ended December 31, 2021 from $35,547 for the three months ended December 31, 2021. The cost of services is credit card processing fees and Forta cost of brokerage services.
Professional services expenses include legal expense, professional fees, and business consulting. Professional services expenses decreased $35,536 to 97,194 for the three months ended December 31, 2021 from $132,730 for the three months ended December 31, 20219 This decrease is primarily due to an decrease in legal fees.
Depreciation and amortization expenses include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses decreased $13,368 to $21,962 for the three months ended December 31, 2021 from $35,330 for the three months ended December 31, 2020. The decrease is due to some assets becoming fully depreciated.
General and administrative expenses decreased $194,150 to $142,616 for the three months ended December 31, 2021 from $336,766 for the three months ended December 31, 2020. The decrease is primarily due to reduction in rents, due to tendering the Denver leased space back to the landlord, $134,656, and a reduction in technology expenditures, $97,775.
| 21 |
Marketing expenses increased slightly by $6,506 to 27,052 for the three months ended December 31, 2021 from $20,546 for the three months ended December 31, 2020. The increase is due to the Company increasing some marketing channels.
Compensation expenses increased $26,670 to $1,361,452 for the three months ended December 31, 2021 from $1,334,782 for the three months ended December 31, 2020. The overall increase was principally due to increases of $177,358 in Salaries, offset by reductions in Commissions $125,287 and employee insurance $16,311.
The Company experienced a decrease in its net loss of $119,620 to a net loss of $74,740 for the three months ended December 31, 2021 from a net loss of $194,360 for the three months ended December 31, 2020, primarily attributable to the reasons noted above. $71,869 of the net loss was attributed Forta’s operations which will be discontinued. Excluding Forta, the net loss was approximately $1300 for the three months ended December 31, 2021.
Significant Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements.
Use of Estimates and Assumptions.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition and Accounts Receivable.
The Company derives its revenues primarily from the following activities: Investment Management Fees, Securities Brokerage Commissions, Tax Master Network subscriptions, Tax Operating System subscriptions, Financial Advisor subscriptions, Tax BluePrint sales, and Insurance Sales.
Investment management fees are recognized as services are provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage clients’ investments. Fees are generally paid quarterly, in advance, for each quarter or monthly in arrears. Revenues are earned over the period in which the service is provided, which is typically monthly.
The Company generates services income which is recognized when consulting and other professional services are performed by the Company (primarily from TMN and FGEM). Income is recognized as services are delivered.
Revenue represents gross billings less discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as contract liabilities in the accompanying consolidated balance sheets.
Accrued revenues are recorded for investment management fees that are paid in arrears. The allowance for doubtful accounts was $0 and $0 as of December 31, 2021 and September 30, 2021, respectively.
| 22 |
In the normal course of business, the Company extends credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
FGAM, FGFOS and Forta generate investment management fees for services provided by the Company. Investment management fees include fees earned from assets under management by providing professional services to manage client investments. Revenue is recognized as earned, at the end of each monthly period.
FGIS and Forta generate commission revenue from the sale of securities and annuities and premiums on life insurance policies. The revenue is recognized when commissions are earned, or when it is determined that annuities or insurance products are sold, which is typically at trade date. Commissions are received after products are sold, issued or in force.
FGEM generates revenue from insurance marketing services for insurance agents, including sourcing of insurance policies through selling agreements. Revenue is recognized when the policies have been accepted by the issuer and it is probable the commission will be received.
Tax Master Network has five levels of network subscription services that are charged and collected on a month-to-month basis. None of these programs come with a long-term commitment or contract, and there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month requested and memberships are closed at the end of the period for which the most recent payment was made. Members are not entitled to refunds for unused memberships. Any subscription fees paid for a future period are deferred in the financial statements. TMN also sells Tax Blueprint®. These are tax planning strategies guides, to save customers taxes through the implementation of the recommended tax strategies. After an initial assessment, the customers pay half of the year one tax savings. A contract liability is recognized when the customer payment is received. Revenue is deferred until the customer reviews and accepts the final Tax Blueprint® document and returns an executed delivery agreement.
Trade accounts receivable are carried only for subscription revenues not received in the period they apply to. The allowance for doubtful accounts was $0 and $0 as of December 31, 2021 and September 30, 2021 respectively.
In the normal course of business, the Company extends credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
Stock-Based Compensation.
The Company recognizes the fair value of stock-based compensation awards as wages in the accompanying statements of operations for employee grants, commissions for non-employee grants, and stock appreciation rights grants, on a straight-line basis over the vesting period, using the Black-Scholes option pricing model, which is based on risk-free rate of 0.59% in the quarter ended December 31, 2021, dividend yield of 0%, expected life of 10 years and volatility of 35% to 40% in 2020. SAR awards are new this year and are being treated as a liability award while the options are being treated as equity awards. While the fair value of the options are based on the Black Scholes assumptions included here, the SAR awards are based on assumptions at period end and are treated as liability awards. Forfeitures are recorded as they occur.
| 23 |
Liquidity and Capital Resources
As of December 31, 2021, the Company had cash and cash equivalents of $353,183. The increase in cash and cash equivalents from September 30, 2021 was due to net cash provided by operating activities of $49,897 and net cash used in investing activities of $0, and net cash used in financing activities of $2,584.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued growth and establishment of a stronger brand.
For the three months ended December 31, 2021, the Company reported $1,595,893 in revenue, a net loss of $74,740, increase of cash of $47,314, and an accumulated deficit of $14,488,610. These operating results raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
In in February of 2021, Forta received a PPP loan of $422,900. The loan may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loan will be eligible for forgiveness, which would result in an increase in capital of $422,900.
Company’s plans for expansion include attracting additional clients through marketing efforts with its current and future brokerage, investment management and insurance agent representatives, as well as increasing the TMN membership and the investment advisory activity of the members to increase assets under management and Company’s revenue. Future growth plans will include efforts to increase advisory activity through TMN members. There is no guaranty that the Company will achieve these objectives.
Off Balance Sheet Transactions and Related Matters
There are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
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 December 31, 2021. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on its evaluation, management concluded as of December 31, 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.
| 24 |
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. The Company’s Chief Executive Officer and Chief Financial Officer assessed the effectiveness of its internal control over financial reporting as of December 31, 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 December 31, 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 has been made since fiscal year end 2021.
| 25 |
Part II Other Information
Item 1. Legal Proceedings
From time to time, we are a party to or otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. A subsidiary of the Company is currently involved in two 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.
No changes from September 30, 2021 10-K annual report.
In January 2022, Forta’s clearing firm sent a notice of termination, and has assessed a termination fee of $250,000 as per its contractual right. Forta does not have the resources to pay the termination fee, and the clearing firm will apply all cash balances that it holds to the payment of the termination fee. That will result in the transfer of in excess of $100,000 from Forta to the clearing firm and increase liabilities in the net amount of approximately $150,000. In addition, Forta has violated its net capital requirements with FINRA and Forta has shut down its broker dealer operations. Management is considering dissolving Forta, and that decision will likely be made next fiscal quarter.
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 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 December 31, 2021. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on its evaluation, management concluded as of December 31, 2020 that its disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, described below in Management’s Report on Internal Control Over Financial Reporting. Notwithstanding the identified material weaknesses, management believes the financial statements included in this Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
| 26 |
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. The Company’s Chief Executive Officer and Chief Financial Officer assessed the effectiveness of its internal control over financial reporting as of December 31, 2020. In making this assessment, its management used the criteria based on the framework in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2020, its internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles. The Company’s Chief Executive Officer and Chief Financial Officer reviewed the results of their assessment with its board of directors.
Based on its evaluation under this framework, management concluded that its internal control over financial reporting was not effective as of the evaluation date due to the factors stated below.
| • | Insufficient Resources: The Company has inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting to be able to have appropriately designed and operating entity level controls including risk assessment; information and communication; monitoring; and financial reporting. | |
| • | Inadequate Segregation of Duties: The Company has inadequate number of personnel to properly segregate duties to implement control procedures. |
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
No changes in Internal Control over Financial Reporting has been made since fiscal year end 2020.
| 27 |
Part II Other Information
Item 1. Legal Proceedings
From time to time, we are a party to or otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise. A subsidiary of the Company is currently involved in one legal proceeding, the outcome of which will not be material to our ability to operate or market our services, our consolidated financial position, results of operations or cash flows.
Item 1A. RISK FACTORS.
No changes from September 30, 2020 10-K annual report.
In January 2022, Forta’s clearing firm sent a notice of termination, and has assessed a termination fee of $250,000 as per its contractual right. Forta does not have the resources to pay the termination fee, and the clearing firm will apply all cash balances that it holds to the payment of the termination fee. That will result in the transfer of in excess of $100,000 from Forta to the clearing firm and increase liabilities in the net amount of approximately $150,000. In addition, Forta has violated its net capital requirements with FINRA and Forta has shut down its broker dealer operations. Management is considering treating Forta as a discontinued operation, and that decision will likely be made next fiscal quarter.
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) |
| 28 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: February 14, 2022 | By: /s/ Scott Winters |
| Scott Winters | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: February 14, 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 | February 14, 2022 | |
| Scott Winters | (principal executive officer) | ||
| /s/ Gary Nemer | CFO | February 14, 2022 | |
| Gary Nemer | (principal financial officer) | ||
| /s/ John Pollock | Co-Chairman, EVP | February 14, 2022 | |
| John Pollock | |||
| /s/ Edward A. Lyon | Director | February 14, 2022 | |
| Edward A. Lyon | |||
| /s/ Jennifer Winters | Director | February 14, 2022 | |
| Jennifer Winters | |||
| /s/ William R. Nelson | Director | February 14, 2022 | |
| William R. Nelson | |||
|
/s/ Mark Williams |
Director |
February 14, 2022 | |
| Mark Williams |
| 29 |