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 During 2021, the Company experienced a year of significant decline in the number of active franchises, compared to fiscal year 2020, decreasing from 451 franchise territories to 274, within the two brands. The reduction in the overall number of franchises was to the termination of franchises during the period is the result of the company working to discharge non-performing franchisees from the system and the interruption of sales of new franchises as a result of the Coronavirus ("COVID-19") pandemic. The increased termination of franchises in fiscal year 2021 resulted in a slight increase in initial franchise fees of approximately$19,000 in a year-to-year comparison as a result of the acceleration of deferred franchise sale revenues. The Company's royalty fees revenue decreased to approximately$774,000 in fiscal year 2021 from approximately$1,448,000 in the prior year, a decrease of$674,000 (47%), primarily due to an increasing number of non-performing franchisees. Marketing fund revenue decreased approximately$130,000 in the year endedSeptember 30, 2021 primarily due to the impact of COVID-19, as the Company elected not to charge franchisees any marketing fund fees for fiscal 2021. Technology fees decreased by 35% in the year endedSeptember 30, 2021 primarily due to the impact of COVID-19 and the increasing number of non-performing franchises. Operating expenses decreased overall in fiscal year 2021 as compared to fiscal 2020 with a 24% decrease year over year. The Company had net income of approximately$325,000 in fiscal year 2021, down from a net income of approximately$620,000 the prior year, a decrease of approximately$295,000 . The decrease in net income was primarily due to the decline in revenues in fiscal 2021 as compared to fiscal 2020, which was primarily due to the reduced level of royalty revenues, marketing fund fees, and technology fees from active franchisees which were a direct result of the adverse impact of the COVID-19 pandemic on our franchisees' operations. As a result of challenges faced by our Learning Business, inDecember 2021 , our board elected to change the business focus of the Company by entering into the Share Exchange Agreement to acquire DIA and a separate agreement to dispose of our Learning Business if the acquisition of DIA closes. See "Item 1. Business." As a result, the following description of our operating results and liquidity may not be representative of our future operating results and liquidity. Results of Operations
The following table represents the Company's franchise sales activity for the
fiscal years ended
21
Franchises Sold
Fiscal Years Ended
Franchise Activity September 30
1
(b) US/Canada Second Territories - -
Total US/Canada - 1
International First Territories - -
International Second Territories - -
Master Agreements - -
Master Sub-franchise - 14
Total International - -
Total BFK - 15
SF Franchise Company LLC
US First Territories - -
International Territories - -
Total SF - -
Total Franchises Sold - 15
(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 September 30, 2021 as compared to the prior year are discussed
below.
Revenues
Fiscal year Ended
Increase/ September 30, September 30, Change
Item Description Decrease 2021 2020 Amount Percentage
Revenue
Initial franchise fees Increase $ 1,257,217 $ 1,237,994 $ 19,223 2 %
Royalties Decrease 773,592 1,448,228 $ (674,636 ) (47 )%
Marketing fund revenue Decrease - 130,496 $ (130,496 ) (100 )%
Technology fees Decrease 143,614 221,722 $ (78,108 ) (35 )%
Merchandise sales Increase 20,771 - $ 20,771 100 %
Total Revenue Decrease $ 2,195,194 $ 3,038,440 $ (843,246 ) (28 )%
22
The primary cause of the slight increase in initial franchise fees was due to a higher level of acceleration of deferred revenues resulting from an increase in the termination of non-performing franchisees in fiscal 2021, which was offset by a lower average level of deferred revenues attributable to terminated franchise agreements in fiscal 2021. The primary cause of the decrease in royalties and technology fees was due to the fewer franchises paying royalties and technology fees as a result of the termination of non-performing franchisees from the system, and the interruption of normal operation at remaining franchises because of the COVID-19 pandemic. Also, due to the impact of the COVID-19 pandemic on the business of our franchisees, we voluntarily elected to cease pursuing collections of our marketing fees from our franchisees inMarch 2020 , which continued for all of fiscal 2021. During fiscal 2021 we were able to sell our Bricks 4 Kidz® supply kits that were on hand (purchased and expensed in prior years), which resulted in an increase in merchandise sales with no related cost of goods sold recorded. Operating Expenses Total operating expenses for the comparable periods endedSeptember 30, 2021 and 2020 were approximately$1,870,000 and$2,453,000 , respectively, a decrease
of approximately$583,000 . Fiscal Year Ended September 30, Change Increase/ Item Description Decrease 2021 2020 Amount Percentage Franchise commissions Increase$ 298,389 $ 288,734 $ 9,655 3 % Salaries, payroll taxes & stock-based compensation Decrease 452,258 613,683
$ (161,425 ) (26 )% General advertising Decrease 45,997 81,413$ (35,416 ) (44 )% Franchisee marketing Decrease - 130,496$ (130,496 ) (100 )% Professional, legal & consulting fees Decrease 423,631 565,996$ (142,365 ) (25 )% Bad debt expense Decrease (48,621 ) 349,794$ (398,415 ) (114 )% All other G&A expenses Increase 698,374 422,869$ 275,505 65 %
Total Operating Expenses Decrease
$ (582,957 ) (24 )%
The changes in significant operating expenses are explained as follows:
Franchise commissions remained relatively unchanged primarily as a result of flat franchise sales.
The Company incurred salaries, payroll expenses and stock-based compensation for the fiscal years endedSeptember 30, 2021 and 2020 of approximately$452,000 and$614,000 , respectively, a decrease of approximately$161,000 , or 26%. The decrease in total payroll expenses is primarily due to the reduction of both employee headcount and remaining salaries.
The Company paid general advertising expenses for the fiscal years ended
No franchisee marketing was paid out of the marketing fund using funds collected from franchisees as per the terms of their franchise agreements. This was because the Company did not collect any marketing funds during the year as a result of the COVID-19 pandemic. The Company paid professional, legal and consulting fees for the fiscal years endedSeptember 30, 2021 and 2020 of approximately$424,000 and$566,000 , respectively, a decrease of approximately$142,000 , or 25%. The decrease in professional, legal and consulting fees is primarily due to the settlement of two legal disputes during fiscal 2021, and fact that the remaining material litigation matter was in an inactive status as a result of COVID-19 and ongoing settlement discussions. 23
Bad debt expense for the fiscal years endedSeptember 30, 2021 and 2020 was approximately$(49,000) and$350,000 , respectively, a decrease of approximately$398,000 , or 114%. During the year endedSeptember 30, 2021 several receivables deemed uncollectible in the prior year were collected causing a credit to bad debt expense. All other general and administrative expenses for the fiscal years endedSeptember 30, 2021 and 2020 were approximately$698,000 and$423,000 , respectively, an increase of approximately$276,000 , or 65%. The change in fiscal 2021 as compared to fiscal 2020 was primarily the result of a loss on legal settlements of$290,000 incurred in fiscal 2021. Absent the legal settlement, all other general and administrative expenses were relatively flat year to year.
Liquidity and Capital Resources
During the current year, the Company had net income of approximately$325,000 and has sufficient cash on hand to cover expenses for the next 12 months, provided the Company only operates the Learning Business for the next 12 months. However, the Company has entered into agreements to acquire DIA and dispose of the Learning Business, and if those agreements are consummated the Company's liquidity will be determined in reference to DIA's profitability and capital needs instead. The COVID-19 outbreak has been declared a pandemic by theWorld Health Organization , has spread tothe United States and many other parts of the world and has adversely affected our business operations, employee availability, financial condition, liquidity and cash flow and the length of such impacts
are uncertain. The outbreak of COVID-19 continues to affectthe United States and globally, and related government and private sector responsive actions have and will continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation continues to evolve. The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating in heavily populated areas without masks, vaccinations and testing, such as malls and shopping centers. Among the precautions was the cessation of in-person learning at a substantial portion of the schools inthe United States , which has adversely impacted our royalty revenue from franchisees and our ability to sell new franchises. There is significant uncertainty around the breadth and duration of these school closures and other business disruptions related to COVID-19, as well as its impact on theU.S. and global economy. Many public schools resumed some or all in person learning in the Fall of 2021, but many have since reverted back to remote learning with the advent of the Omicron strain of COVID-19 inDecember 2021 . The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. We have asked some of our corporate employees whose jobs allow them to work remotely to do so a few days a week for the foreseeable future. Such precautionary measures could create operational challenges, as we adjust to a remote workforce, which could adversely impact our business. We had cash flows used in operating activities of approximately$75,000 for the year endedSeptember 30, 2021 compared to cash flows used in operating activities of approximately$306,000 for the year endedSeptember 30, 2020 . The decrease in cash flows used in operating activities for the year endedSeptember 30, 2021 compared to the year endedSeptember 30, 2020 relates primarily to the successful collection of receivables in the current year that had been allowed for in the prior year and increases in accrued liabilities in fiscal 2021. We had cash flows used in investing activities of approximately$18,000 for the year endedSeptember 30, 2021 compared to cash flows provided by investing activities of approximately$94,000 for the year endedSeptember 30, 2020 . The decrease in cash flows provided by investing activities was primarily due to a reduction in assets held for sale as we completed the liquidation of unneeded real estate assets in the 2020 fiscal year and the purchase of the intangible assets ofBricks4Schoolz, LLC in 2021. During the fiscal years endedSeptember 30, 2021 and 2020, the Company purchased for cash property and equipment totaling approximately$3,100 and$0 , respectively. 24 We had$0 cash flows provided by financing activities for the year endedSeptember 30, 2021 compared to cash flows provided by financing activities of$120,000 for the year endedSeptember 30, 2020 . The decrease in cash flows provided financing activities was primarily due to receipt of a Paycheck Protection Program (the "PPP") under Division A, Title I of the CARES Act, which was enactedMarch 27, 2020 in the amount of$119,980 in fiscal 2020. The loan, which was in the form of a note datedApril 24, 2020 issued by the Company, matures onApril 23, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing onOctober 23, 2020 . The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the loan may only be used for payroll costs, cost used to continue group health care benefits, mortgage payments, rent, utilities and interest on other debt obligations incurred beforeFebruary 15, 2020 . Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company used the entire loan amount for qualifying expenses, and expects the loan to be forgiven, and therefore has not recorded any accrued interest on the loan. During the first half of fiscal 2020, the Company temporarily suspended domestic franchise offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in compliance with FTC Franchise Rule, Section 436.7(a) due to delays in completion of the Company's fiscal year 2018 and 2019 consolidated audited financial statements. In addition, in the second half of fiscal 2020 the Company's sales of new franchises were hindered by the COVID-19 pandemic. The Company obtained approval to offer and sell new franchises in many jurisdictions in fiscal 2021; however, new sales continued to be hampered by the COVID-19 pandemic.
The Company is dependent upon both franchise sales and royalty fees to continue current business operations and liquidity.
Contractual Obligations
OnOctober 21, 2021 , the Company leased approximately 2,480 square feet of office space at1637 S. Main Street ,Milpitas, CA 94035 for its corporate offices. The lease has a term of two years and one month. The Company is obligated to pay base rent of$4,588 per month in the first year,$4,726 per month in the second year, and$4,867 per month in the last month, plus a pro rata share of common area expenses.
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 On or aboutDecember 6, 2019 ,Christopher Rego andRod Whiton (the "Solicitors"), prior to their appointments as officers or directors of the Company, commenced a consent solicitation to the shareholders of the Company and onFebruary 5, 2020 , the Company and the Solicitors entered into an agreement to settle their dispute over the consent solicitation. The settlement resulted in the Company paying$10,000 as reimbursement for certain costs that they incurred related to the consent solicitation, the Company agreeing to appointMr. Rego andMr. Whiton to the board, and the Company's agreeing to appointMr. Rego as chief executive officer, among other provisions. The Company ultimately paid a total of$20,000 in costs incurred by Messrs. Rego and Whiton in relation to the consent solicitation.
Bart Mitchell resigned as President of the Company onJune 8, 2020 at which time he received a severance package of$50,000 . Additionally, during the year endedSeptember 30, 2020 ,Mr. Mitchell no longer wanted his 279,406 shares, therefore, he returned them to the Company for no consideration and the Company cancelled them. 25
Christopher Rego has been a director sinceFebruary 5, 2020 , and our Chief Executive Officer sinceMay 1, 2020 . Prior to his appointment,Mr. Rego purchased an active franchise inCalifornia . During the years endedSeptember 30, 2021 and 2020, the Company recognized royalty revenues from the franchise of$6,750 and$16,650 , respectively, recognized technology fee revenues from the franchise of$900 and$900 , respectively, and recognized marketing fee revenues from the franchise of$0 and$829 , respectively. Total payments made by the franchisee were$7,650 and$8,581 , respectively. As ofSeptember 30, 2021 and 2020 the accounts receivable balance with the franchise was$1,897 and the Company had allowed for$1,334 and$1,116 , respectively, for net AR balances of$563 and$781 , respectively. Accordingly, during the year endedSeptember 30, 2021 the Company increased their allowance forMr. Rego's franchise accounts by$218 . As ofSeptember 30, 2021 and 2020 the franchises had deferred revenue balances of$0 . John Simento has been a director of the Company sinceMay 19, 2020 . Prior toMr. Rego's and Mr. Simento's appointments with the Company, they purchased a Company franchise in theUnited Arab Emirates (the "UAE"). The Company filed an arbitration complaint against them inDecember 2019 regarding issues related to opening the franchise. The complaint was resolved by a Settlement Agreement datedFebruary 5, 2020 . Under the Settlement Agreement, the Company forgave all back royalty fees throughJuly 2019 , equaling$18,825 , and agreed to defer all other fees until the franchise was able to obtain a business license to operate in theUAE ., which is currently delayed due to the Coronavirus pandemic. The franchise is currently non-operational as a result of an inability to obtain the issuance of a business license from theUAE due to the Coronavirus pandemic. If the franchise is not able to procure the necessary authorizations to operate, the franchisees would not owe any franchise fees. As a consequence, we have not realized any revenue from the franchise and no payments have been received on outstanding balances. As ofSeptember 30, 2021 and 2020 the accounts receivable balance with the franchise was$10,613 and the Company had allowed for$10,613 and$8,925 , respectively, for net AR balances of$0 and$1,688 , respectively. Accordingly, during the year endedSeptember 30, 2021 the Company increased their allowance for theUAE franchise account by$1,688 .Mr. Rego is also the CEO of Teknowland, a software development company, with which the Company entered into an agreement onMarch 10, 2020 to perform development and maintenance services in relation to the Company's franchise management software. The term of the agreement was six months, subject to auto-renewal until Teknowland had completed its obligations under the agreement, but subject to each party's right to terminate the agreement at any time on 30 days' notice. Under the agreement, the Company was obligated to pay Teknowland a fee of$12,900 per month for development and maintenance services. Starting inNovember 2020 , the Company and Teknowland orally agreed to reduce the monthly amount that the Company is obligated to pay to$3,000 per month. During the year endedSeptember 30, 2020 , the Company andMr. Rego orally agreed thatMr. Rego and Teknowland would develop an eLearning program to enable the Company to offer educational programs over the internet. No agreement was reached regarding whether the Company or Teknowland would own the eLearning program, or the terms under which the Company would be entitled to use the program on a long-term basis, whether as owner or licensee. The Company orally agreed to pay Teknowland$10,000 per month for five months for hosting and content costs incurred by Teknowland. After testing the program, the Company's board decided inDecember 2020 not to pursue theE-Learning program.
Beginning in
OnFebruary 12, 2021 , the Company,Chris Rego and Teknowland entered into an agreement under which the parties mutually agreed to terminate theMarch 10, 2020 agreement to develop and maintain the Company's franchise management system, and the oral agreement under which Teknowland hosted the Company's website. In both cases, the Company has engaged an independent firm to provide the services. Under the same agreement, the Company agreed to transfer and assign to Teknowland all of the Company's rights in theE-Learning program developed by Teknowland for the Company. The Company evaluated theE-Learning program on a trial basis, and elected not to pursue it as a line of business. The Company agreed to pay Teknowland$50,000 to pay all invoices associated with the two agreements and theE-Learning program, of which$20,000 was payable at execution of the agreement,$20,000 was payable 30 days later and$10,000 was payable 60 days later. As ofSeptember 30, 2021 the entire amount had been
paid. 26
During the year ended
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. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates and assumptions made by management include allowance for doubtful accounts, allowance for deferred tax assets, depreciation of property and equipment, recoverability of long-lived assets and fair value of equity instruments. Actual results could differ from those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. 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. 27
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. 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 as of the date of adoption. 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.
28
Contract Liability - Deferred Revenue
In conjunction with the adoption of ASC 606, effective
Contract Liability / Asset -
Per the terms of the franchise agreements, the Company collects 2% of franchisee's gross revenues for a marketing fund, managed by the Company, to allocate toward 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, presented as restricted cash on the balance sheet. 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 marketing fund revenues and expenses on a gross basis on its statement of operations. Any unused funds at the end of the period are recorded as accrued marketing fees or any funds used in excess of funds collected are recorded as a marketing fund receivable. The Company expects to collect this advance in future periods from the 2% fees collected on future franchisee gross revenues.
Contract Asset - Prepaid Commission Expense
In accordance with ASC 606 the costs related to obtaining a contract are to be capitalized as long as the costs are recoverable and incremental. EffectiveOctober 1, 2019 , the date the Company adopted ASC 606, they capitalized the value of sales commissions as a contract asset and is amortizing those costs straight-line over the contract life of the franchise agreement to which they relate. 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. 29
Recent Accounting Pronouncements
The Company has reviewed all newly issued accounting pronouncements, including those that are not yet effective, and all have been deemed either immaterial or not applicable.
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