DRIVEITAWAY HOLDINGS, INC. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K. All information presented herein is based on the Company's fiscal year, which endsSeptember 30 . Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company's fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Overview The Company experienced a year of decline in the number of active franchises, compared to fiscal year 2018, decreasing from 557 franchise territories to 503, within the two brands. The reduction in the growth rate of franchises sold in fiscal year 2019 resulted in a decrease in initial franchise fees of approximately$36,000 in a year-to-year comparison, not including the effects of FASB ASC 606 which was implemented onOctober 1, 2018 . The decrease in franchise sales was due to a lack of marketing sales worldwide and more stringent qualification procedures. Sales were also negatively affected by a prolonged audit wherein the company was not able to file an updated FDD; a requirement to sell franchises domestically. The loss of the territories during the period is the result of the company working to discharge our non-performing franchisees from the system. The Company's royalty fees revenue decreased to$1,695,788 in fiscal year 2019 from$2,207,442 in the prior year, a decrease of$511,654 (23%), primarily due to an increasing number of non-performing franchisees. Operating Expenses remained fairly consistent overall between fiscal year 2019 and 2018 with a 2% decrease year over year. The Company had net income of$2,017,340 in fiscal year 2019, up from a net loss of$218,833 the prior year, an increase of$2,236,173 primarily due to the effects of applying FASB ASC 606 during the year.
During fiscal year 2018, the Company, in accordance to FTC Franchise Rule
436.7(a), suspended sales of new franchises in
Results of Operations
The following table represents the Company's franchise sales activity for the
fiscal years ended
Franchises Sold
Franchise Activity Fiscal Years Ended
Creative Learning Corporation September 30
BFK Franchise Company LLC 2019 2018
(a) US/Canada First Territories 3 3
(b) US/Canada Second Territories 3 3
Total US/Canada 6 6
International First Territories - 1
International Second Territories - -
Master Agreements - -
Master Sub-franchise 18 -
Total International 18 1
Total BFK 24 7
SF Franchise Company LLC
US First Territories - -
International Territories - -
Total SF - -
Total Franchises Sold 24 7
(a) US First Territory refers to the original territory purchased with the
Franchise Agreement.
(b) Second Territory refers to a secondary territory purchased in addition to
the territory purchased with the Franchise Agreement.
Material changes of items in the Company's Statement of Operations for the
fiscal year ended
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Initial franchise fees, Royalty fees and Merchandise sales
Fiscal year Ended
Increase/ (rounded to $1,000 ) Change
Item Description Decrease 09/30/19 09/30/18 Amount %
Revenue
Initial franchise fees Increase $ 2,480,000 $ 192,000 $ 2,288,000 1192 %
Royalties fees Decrease 1,696,000 $ 2,207,000 (511,000 ) -23 %
Marketing fund revenue Increase 223,000 $ - 223,000 100 %
Technology fees Increase 118,000 $ - 118,000 100 %
Merchandise sales Increase 1,000 18,000 $ (17,000 ) -94 %
Total Revenue Increase $ 4,518,000 $ 2,417,000 $ 2,101,000 87 %
The primary increase in Initial franchise fees and marketing fund revenue is due
to the accounting entries made during the year to record the effects of FASB ASC
606 which the Company adopted on October 1, 2018 . The increase in technology
fees is the result of franchisee's being charged monthly fees for the use of the
Company's Franchise Management Tool software which went into service in December
2018 . The decrease in royalty fees is due to the loss of some franchisees that
the Company has not been able to replace with the sales of new franchises. The
loss of territories during the period is the result of the Company working to
discharge our non-performing franchisees from the system. The Company began
selling merchandise during the year ended September 30, 2018 . The merchandise
revenue was made up of lanyards and other promotional items. We expect our
royalty revenue to decrease in 2020 as a result of the widespread school
closures in the United States in response to the Covid-19 pandemic, which has
resulted in a drastic reduction of programs conducted by our franchisees in
schools, which has drastically reduced their revenue. We do not expect our
royalty revenue to return to normal levels until the widespread school closures
in the United States have ended.
Operating Expenses
Total operating expenses for the comparable periods ended September 30, 2019 and
2018 were approximately $2,564,000 and $2,625,000 , respectively, a decreaseof approximately$61,000 . Fiscal Year Ended September 30, Increase/ Item Description Decrease 2019 2018 Amount Change % Franchise commissions Increase$ 606,000 $ 51,000 $ 555,000 1088 % Salaries, payroll taxes & stock based compensation Increase 885,000 696,000 189,000 27 % General marketing expenses Decrease 21,000 30,000 (9,000 ) -30 % Franchisee marketing Increase 223,000 - 223,000 100 % Professional, legal & consulting fees Decrease 540,000 598,000 (58,000 ) -10 % Bad debt expense Decrease (67,000 ) 733,000 (800,000 ) -109 % All other G&A expenses Decrease 356,000 517,000 (161,000 ) -31 %$ 2,564,000 $ 2,625,000 $ (61,000 )
The changes in significant operating expenses are explained as follows:
Franchise commissions increased primarily as a result of the application of FASB
ASC 606 during the year ended
20 The Company incurred salaries, payroll expenses and stock based compensation for the fiscal years endedSeptember 30, 2019 and 2018 of approximately$885,000 and$696,000 , respectively, an increase of approximately$189,000 , or 27%. The increase in total payroll expenses is primarily due to increased executive compensation - made up of common shares and cash - which was approved to be paid to the board of directors during the year endedSeptember 30, 2019 for their services provided since July of 2017. The Company paid general marketing expenses for the fiscal years endedSeptember 30, 2019 and 2018 of approximately$21,000 and$30,000 , respectively, a decrease of approximately$9,000 , or 31%. The decrease related to the implementation of more lead marketing in the year endedSeptember 30, 2018 , particularly through social media channels. Franchisee marketing of$223,000 was paid out of the marketing fund using funds collected from franchisees as per the terms of their franchise agreements. These funds were collected and remitted for the cost of national branding of the Company's concepts to benefit the franchisees. The marketing fund amounts owed to the Company are accounted for as a liability on the balance sheet and the actual collections are deposited into a marketing fund bank account. Expenses pertaining to the marketing fund activities are paid from the marketing fund and reduce the liability account. Upon adoption of FASB 606 onOctober 1, 2018 , the Company presents these revenues on a gross revenue basis on its statement of operations. Any unused funds at the end of the period are recorded on the balance sheet as accrued marketing fees.
Prior to adoption of FASB ASC 606, these collections and expenses were all
recorded on the balance sheet, therefore, Franchise marketing expense at
The Company paid professional, legal and consulting fees for the fiscal years
ended
The decrease in professional, legal & consulting fees is primarily due to the elevated level of professional fees in the prior year. The professional fees in fiscal year 2018 were due predominantly toSEC related matters, franchise regulatory matters and corporate governance matters that resulted from the
prior management's decisions. In light of the substantial drop in royalty revenues that we expect for 2020 as a result of the Covid-19 pandemic, we are actively considering various cost reduction measures, including reductions in general and administrative expenses, suspension of franchise marketing, and reductions in legal and professional fees in order to align our expenses with our expected revenues during the disruption caused by the Covid-19 pandemic. There is no assurance that we will be able to reduce our expenses to the same extent that our revenues are impacted by the pandemic, with the result that we may report of loss from operations until the disruptions caused by the Covid-19 pandemic have abated. 21 The Company recorded an additional reserve for both notes receivable and accounts receivable during the year endedSeptember 30, 2018 due to the slowdown and issues in collections for both types of receivables. During the year endedSeptember 30, 2019 several receivables deemed uncollectible in the prior year were collected causing a credit to bad debt expense.
Liquidity and Capital Resources
During the current year, the Company had net income of approximately
We had cash flows provided by operating activities of approximately$398,000 for the year endedSeptember 30, 2019 compared to cash flows used in operating activities of approximately$26,000 for the year endedSeptember 30, 2018 . The increase in cash flows provided by operating activities for the year endedSeptember 30, 2019 compared to the year endedSeptember 30, 2018 relates primarily to the increase in net income. We had cash flows provided by investing activities of approximately$39,000 for the year endedSeptember 30, 2019 compared to cash flows used in investing activities of approximately$203,000 for the year endedSeptember 30, 2018 . The increase in cash flows provided investing activities was primarily due to the sale of assets held for sale during the year endedSeptember 30, 2019 . Cash funds are used for ongoing operating expenses, the purchase of equipment, property improvement, and software development. During the fiscal years endedSeptember 30, 2019 and 2018, the Company purchased property and equipment totaling approximately$118,000 and$193,000 , respectively, and no intangible property. The Company has currently temporarily suspended domestic franchise offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in compliance withFTC Franchise Rule, Section 436.7(a) due to delay in completion of the Company's fiscal year 2018 and 2019 consolidated audited financial statements. In turn, this delayed completion of the Company's 2018 and 2019 FDDs for the Bricks 4 Kidz® and Sew Fun Studios® franchise offerings
The Company is dependent upon both franchise sales and royalty fees to continue current business operations and liquidity.
22 Contractual Obligations The Company entered into a Business Lease withVillage Square atPalencia inJuly 2014 , to lease unit 114 located at701 Market Street ,St. Augustine, Florida . The contract period beganJuly 1, 2014 and endedJune 15, 2019 , upon which time, the Company relocated all of its physical operations toBoise, Idaho and signed a month-to-month lease agreement untilOctober 2019 when the Company signed a 21 month lease for office space at 5995 W State Street Suite B,Garden City, ID 83703. The monthly lease amount is$833 .
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company's financial condition, changes in financial condition, and results of operations, liquidity or capital resources. Related Party Transactions InDecember 2017 , the Company granted a total of 14,286 warrants to two Directors of the Company. These warrants were granted in conjunction with the issuance of standby letters of credit from the two directors. The warrants had an exercise price of$0.14 per share and expired five years from the date of grant. These warrants were valued using the Black Scholes method. The fair value of the warrants on the date of grant were$2,000 , and the warrants vested immediately. The Company expensed$2,000 in connection with the grant during the year endedSeptember 30, 2018 . These warrants were exercised inSeptember 2019 for 14,286 shares of common stock. The Company agreed to waive the$2,000 exercise price owed in total from these warrant holders, therefore this exercise was done on a cashless basis. EffectiveSeptember 30, 2019 ,Blake Furlow resigned as Chief Executive Officer of the Company.Mr. Furlow will receive a severance payment of$30,000 pursuant to the terms of a Severance Agreement. In connection with the obligations of his former employment agreement, the Company issued an aggregate of 566,176 shares of Common Stock toMr. Furlow . See Note 7.Bart Mitchell entered into an Employment Agreement with the Company as ofOctober 1, 2019 for the term of one year. In addition to cash compensation, he will receive stock grants valued at lesser of$15,000 or 200,000 Shares of Common Stock on the last day of the completed year of employment.Mr. Mitchell continued to serve as a member of the Board of Directors of the Company, but no longer served as the Company's Chief Financial Officer. OnSeptember 30, 2019 , the Company approved the issuance of 166,667 shares toMr. Mitchell as per his CFO agreement for compensation earned during the year endedSeptember 30, 2019 . See Note 7. OnSeptember 27, 2019 , in connection with their service on the Board of Directors for fiscal years 2017, 2018 and 2019, the Company approved the issuance of (i) 99,362, (ii) 272,472, (iii) 112,739 and (iv) 272,472 shares of Common Stock toBlake Furlow ,Gary Herman ,Bart Mitchell andJoyAnn Kenny-Charlton , respectively as well as a total of cash payments of$85,041 . See Note 7. Critical Accounting Policies General
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements. For further information on the critical accounting policies, see Note 1 of the Consolidated Financial Statements. Revenue Recognition The Company generates almost all of its revenue from contracts with customers. The Company's franchise agreements enter the parties into a contractual agreement, typically over a ten years term, and include performance obligations as follows: protected territory designation, access to proprietary manuals and handbooks, initial training and on-going assistance, consulting, promotion of goodwill, administration of marketing fund, marketing and promotion items, initial marketing program development assistance, company website access, Franchise Management Tool access, lessons and model plans, project kits,Duplo bricks, frames stop motion animation software, and use of the franchisor's intellectual property (IP) (e.g., trade name - Bricks for Kidz). Upon entering into a franchise agreement, the Company charges an initial franchise fee, which is fully collectible and nonrefundable as of the date of the signing of the franchise agreement. Further, because the Company's franchises are primarily a mobile concept and do not require finding locations or construction, the franchisees can begin operations as soon as they complete training. Per the terms of the franchise agreements, the Company charges for royalty fees on a monthly basis, generally set at a fixed amount, but in some cases are based on a percentage of franchisee's monthly gross revenues. The Company also charges fees for a marketing fund, generally based on 2% of franchisee's monthly gross revenues, which is managed by the Company, to allocate towards national branding of the Company's concepts to benefit the franchisees. Lastly, the Company charges for technology fees on a monthly basis, generally at a fixed amount, for the use of the company Franchise Management tool as well as company emails,
etc. 23 The Company adopted the new revenue standard (ASC 606) onOctober 1, 2018 for contracts with remaining performance obligations as ofOctober 1, 2018 . The Company elected to apply the new standard retrospectively with an adjustment to the opening balance of retained earnings, therefore comparative information from prior year periods has not been adjusted and continue to be reported under the accounting standards in effect for those periods, specifically under ASC 605. For the year endedSeptember 30, 2018 , under ASC 605, the Company recognized revenue on an accrual basis after services were performed under contract terms and in accordance with regulatory requirements, the service price to the client was fixed or determinable, and collectability was reasonably assured. Accordingly, initial franchise fees were not recognized as revenue until initial training was completed and when substantially all of the services required by the franchise agreement were fulfilled by the Company in accordance with ASC Topic 952-605 Revenue Recognition-Franchisor. Further, royalties and technology fees were recognized as earned on a monthly basis. Lastly, the Company recorded marketing funds collected as a liability on the balance sheet with expenses pertaining to the marketing fund reducing the liability account, thus no income statement impact. AtSeptember 30, 2018 the Company had no unearned revenue for franchise fees collected but not yet earned per their ASC 605 revenue recognition policy. EffectiveOctober 1, 2018 the Company began recognizing revenue under ASC 606. The Company considers initial franchise fees to be a part of the license of symbolic intellectual property ("IP"), therefore the performance obligation related to these fees is satisfied over time as the Company fulfills its promise to grant the customer rights to use, and benefit from, the Company's IP, as well as support and maintain the IP. The initial franchise fee, then, is recorded as deferred revenue at inception and recognized on a straight-line basis over
the contract term. In accordance with ASC 606-10-55-65, the Company has determined that the royalty fees, marketing fees, and technology fees are subject to a sales and usage-based royalties' constraint on licenses of IP. Accordingly, these fees are recognized as revenue at the later of when the sales or usage occurs or the related performance obligation is satisfied. Technology fees are recorded net of processing fees. Marketing fees are limited to marketing amounts expensed; therefore, the Company will recognize amounts received in excess of amounts spent on the balance sheet in the accrued marketing fund liability. The Company collects transfer fees when contracts are transferred between parties and accounts for the transfer as a contract modification under ASC 606. Because the transfer does not increase the scope of the contract or promise any additional goods or services and there are no new distinct services that will be provided after the transfer the Company considers the transfer fee part of the existing contract. Transfer fees, then, are recorded as deferred revenue at inception and recognized on a straight-line basis over the remaining contract term. When contracts are terminated due to default, or in conjunction with an early termination agreement, the Company accounts for the early termination as a contract modification under ASC 606. Because the termination eliminates any future performance obligations of the Company any deferred revenue associated with the terminated contract is recognized into revenue at the time of termination, along with any early termination fees, in the initial franchise fee line on the Company's Statement of Operations.
The Company generates revenue from sales of merchandise where the performance obligation is met, and therefore revenue recognized, upon the delivery of merchandise to the customer.
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Allowance for Doubtful Accounts - Methodology
Accounts Receivable
The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and considers the aging of the accounts receivable balances combined with management's estimate of future potential recoverability. Accounts and receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowances for doubtful accounts atSeptember 30, 2019 and 2018 are adequate, but actual write-offs could exceed the recorded allowance. During the years endedSeptember 30, 2019 and 2018 the balance in the allowance for doubtful accounts was approximately$663,000 and$938,000 , respectively. Notes Receivable ASC 310, Receivables, provides guidance for receivables and notes that arise from credit sales, loans or other transactions. Financing receivable includes loans and notes receivable. Originated loans we hold for which we have the intent and ability to hold for the foreseeable future or to maturity (or payoff) are classified as held for investment. Financing receivables held for investment are reported in our consolidated balance sheets at the outstanding principal balance adjusted for any write -offs , allowance for loan losses, deferred fees or costs, and any unamortized premiums or discounts. Interest income is accrued on outstanding principal as earned. Unamortized discounts and premiums are amortized using the interest method with the amortization recognized as part of interest income in the consolidated statements of operations. During the years endedSeptember 30, 2019 and 2018 the balance in the allowance for doubtful notes receivable was approximately$91,000 and$91,000 , respectively.
Impairment of Property, Plant and Equipment and
The Company's long-lived assets currently consist of property and equipment, and prior to the year endedSeptember 30, 2018 included intangible assets. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management's estimates of asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. During fiscal year 2018, the Company recognized an Impairment Loss on long-lived assets relating to concepts and trademarks forSF LLC . The Company abandoned the revenue stream forSew Fun Studios , for which the previously recorded intangible assets were intended to provide future economic value, and therefore determined that the intangible assets were fully impaired as ofSeptember 30, 2018 .$23,200 was recorded as an impairment loss in the operating expenses on the Consolidated Statements of Operations for the year endedSeptember 30, 2018 . Income Taxes The provision for income taxes and deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized.
The Company reviews its filing positions for all open tax years in all
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a "more likely than not" chance of being sustained (based on the position's technical merits) upon challenge by the respective authorities. The term "more likely than not" means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the "more likely than not" criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management's judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows. The Company's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties atSeptember 30, 2019 and 2018, respectively, and has not recognized interest and/or penalties during the years endedSeptember 30, 2019 and 2018, respectively, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within the next twelve months.
The tax years subject to examination by major tax jurisdictions include the
years 2016 and forward by the
25 Share-based compensation The Company accounts for employee stock awards for services based on the grant date fair value of the instrument issued and those issued to non-employees are recorded based on the grant date fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable. Stock Awards are expensed over the service period. Forfeitures are recognized as they occur.
Recent Accounting Pronouncements
InFebruary 2016 , the FASB issued ASU No. 2016-02, "Leases", which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. The new standard will become effective for the Company beginning with the first quarter in the fiscal year endingSeptember 30, 2020 and requires a modified retrospective transition approach and includes a number of practical expedients. Early adoption of the standard is permitted. The Company is currently evaluating the impact the adoption of this accounting guidance will have on the consolidated financial statements.
All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
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