Driveitaway Holdings, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 ends September 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 2020, the Company experienced a year of decline in the number of active franchises, compared to fiscal year 2019, decreasing from 503 franchise territories to 451, 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, the interruption of sales of new franchises as a result of the Coronavirus (“COVID-19”) pandemic, and the cessation of sales while the Company completed its audit for the fiscal year ended September 30, 2019. The reduction in the growth rate of franchises sold in fiscal year 2020 resulted in a decrease in initial franchise fees of approximately $1,242,000 in a year-to-year comparison. The Company’s royalty fees revenue decreased to approximately $1,448,000 in fiscal year 2020 from approximately $1,696,000 in the prior year, a decrease of $248,000 (15%), primarily due to an increasing number of non-performing franchisees. Marketing fund revenue decreased approximately $92,000 in the year ended September 30, 2020 primarily due to the impact of COVID-19. Technology fees increased by 87% in the year ended September 30, 2020 due to the Company beginning to charge franchisees for the use of their online platform in the prior year. Operating expenses remained fairly consistent overall in fiscal year 2020 as compared to fiscal 2019 with a 4% decrease year over year. The Company had net income of approximately $620,000 in fiscal year 2020, down from a net income of approximately $2,018,000 the prior year, a decrease of approximately $1,397,000 primarily due to the acceleration of deferred revenues in 2019, the slowdown in new franchise sales, and franchisees that were provided a discount by the Company due to the impact of the COVID-19 pandemic on their operations. Results of Operations The following table represents the Company’s franchise sales activity for the fiscal years ended September 30, 2020 and 2019: Franchises Sold Fiscal Years Ended Franchise Activity September 30 Creative Learning Corporation 2020 2019 BFK Franchise Company LLC (a) US/Canada First Territories 1 3 (b) US/Canada Second Territories -- 3 Total US/Canada 1 6 International First Territories - - International Second Territories - - Master Agreements - - Master Sub-franchise 14 18 Total International -- 18 Total BFK 15 24 SF Franchise Company LLC US First Territories - - International Territories -- -- Total SF -- -- Total Franchises Sold 15 24 (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, 2020 as compared to the prior year are discussed below . 18 Initial franchise fees, Royalty fees and Merchandise sales Fiscal year Ended (rounded to $1,000) Item Description Increase/ Decrease September 30, 2020 September 30, 2019 Amount Change % Revenue Initial franchise fees Decrease $ 1,237,994 $ 2,479,921 $ (1,241,927 ) (50 )% Royalties Decrease $ 1,448,228 $ 1,695,788 (247,560 ) (15 )% Marketing fund revenue Decrease $ 130,496 $ 222,653 $ (92,157 ) (41 )% Technology fees Increase $ 221,722 $ 118,504 $ 103,218 87 % Merchandise sales Decrease $ — 1,098 $ (1,098 ) (100 )% Total Revenue Decrease $ 3,038,440 $ 4,517,964 $ (1,479,524 ) (33 )% The primary cause of the decrease in initial franchise fees was due to the interruption of new franchise sales in fiscal 2020 as a result of the COVID-19 pandemic and delays in completing the Company’s audit for the fiscal year ending September 30, 2019. The primary cause of the decrease in royalties and marketing fund revenue is due to the acceleration of deferred revenues in 2019, fewer franchises paying royalties as a result of the loss of territories during the period from 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 in March 2020. The increase in technology fees is the result of the Company beginning to charge franchisees for the use of their online platform in the prior year. Operating Expenses Total operating expenses for the comparable periods ended September 30, 2020 and 2019 were approximately $2,453,000 and $2,564,000, respectively, a decrease of approximately $111,000. Fiscal Year Ended September 30, Item Description Increase/ Decrease 2020 2019 Amount Change % Franchise commissions Decrease $ 288,734 $ 605,620 (316,886 ) (52 )% Salaries, payroll taxes & stock-based compensation Decrease 613,683 884,715 (271,032 ) (31 )% General marketing expenses Increase 81,413 21,013 60,400 287 % Franchisee marketing Decrease 130,496 222,653 (92,157 ) (41 )% Professional, legal & consulting fees Increase 565,996 540,196 25,800 5 % Bad debt expense Increase 349,794 (67,018 ) 416,812 (622 )% All other G&A expenses Increase 422,869 356,670 66,199 19 % $ 2,452,985 $ 2,563,849 The changes in significant operating expenses are explained as follows: Franchise commissions decreased primarily as a result of lower franchise sales. 19 The Company incurred salaries, payroll expenses and stock-based compensation for the fiscal years ended September 30, 2020 and 2019 of approximately $614,000 and $885,000, respectively, a decrease of approximately $271,000, or 31%. The decrease in total payroll expenses is primarily due to the reduction of both employee headcount and remaining salaries. The Company paid general marketing expenses for the fiscal years ended September 30, 2020 and 2019 of approximately $81,000 and $21,000, respectively, an increase of approximately $60,000, or 287%. The increase related to higher lead advertising expenses. Franchisee marketing of approximately $130,000 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 on October 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. The Company paid professional, legal and consulting fees for the fiscal years ended September 30, 2020 and 2019 of approximately $566,000 and $540,000, respectively, an increase of approximately $26,000, or 5%. The increase in professional, legal and consulting fees is primarily due to the higher legal costs incurred in relation to a shareholder proxy solicitation in fiscal 2020, offset by lower audit fees and lower legal costs from ongoing litigation. The Company recorded an additional reserve for both notes receivable and accounts receivable during the year ended September 30, 2019 due to the slowdown and issues in collections for both types of receivables. During the year ended September 30, 2019 several receivables deemed uncollectible in the prior year were collected causing a credit to bad debt expense. The Company recorded an additional reserve for accounts receivable during fiscal year 2020. Liquidity and Capital Resources During the current year, the Company had net income of approximately $620,000 and has sufficient cash on hand to cover expenses for the next 12 months. The recent COVID-19 outbreak has been declared a pandemic by the World Health Organization, has spread to the 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 grow both in the 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 is rapidly evolving. 20 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, such as malls and shopping centers. Among the precautions has been the closure of a substantial portion of the schools in the 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 the U.S. and global economy. 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 our corporate employees whose jobs allow them to work remotely to do so 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 $306,000 for the year ended September 30, 2020 compared to cash flows provided by operating activities of approximately $398,000 for the year ended September 30, 2019. The decrease in cash flows provided by operating activities for the year ended September 30, 2020 compared to the year ended September 30, 2019 relates primarily to lower initial franchise fees and royalty revenues which resulted in a lower net income. We had cash flows provided by investing activities of approximately $94,000 for the year ended September 30, 2020 compared to cash flows provided by investing activities of approximately $39,000 for the year ended September 30, 2019. The increase in cash flows provided investing activities was primarily due to lower investments in property and equipment, offset by a reduction in assets held for sale as we contemplated the liquidation of unneeded real estate assets in the 2020 fiscal year. During the fiscal years ended September 30, 2020 and 2019, the Company purchased property and equipment totaling approximately $0 and $119,000, respectively, and no intangible property. We had cash flows provided by financing activities of approximately $120,000 for the year ended September 30, 2020 compared to cash flows provided by financing activities of $0 for the year ended September 30, 2019. The increase 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 enacted March 27, 2020 in the amount of $119,980 in fiscal 2020. The loan, which was in the form of a note dated April 24, 2020 issued by the Company, matures on April 23, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on October 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 before February 15, 2020. The Company used the entire loan amount for qualifying expenses. 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. 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 the second half of fiscal 2020 the Company’s sales of new franchises was hindered 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 On November 1, 2020 the Company leased office space at 475 W Townplace, Suite, A, St. Augustine, FL 32092, for monthly rent of $750, where it maintains its principal office. In October 2019, the Company signed a 21 month lease for office space at 5995 W State Street Suite B, Garden City, ID 83703, where it previously maintained its principal office. The Company has prepaid rent for the remainder of the lease term at this space, and has no further obligation under the lease. 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 In December 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 ended September 30, 2018. These warrants were exercised in September 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. 21 Effective September 30, 2019, Blake Furlow resigned as Chief Executive Officer of the Company. Mr. Furlow received a severance payment of $30,000 pursuant to the terms of a Severance Agreement. Pursuant to his employment agreement, the Company also issued an aggregate of 566,176 shares of Common Stock to Mr. Furlow. Effective September 30, 2019, Bart Mitchell, the Company’s Chief Financial Officer, was appointed Chief Executive Officer of the Company. In connection with his appointment, Mr. Mitchell entered into an Employment Agreement with the Company as of October 1, 2019 for the term of one year. In addition to cash compensation, he was entitled to receive stock grants valued at the 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. On September 30, 2019, the Company approved the issuance of 166,667 shares to Mr. Mitchell pursuant to his prior employment agreement for compensation earned during the year ended September 30, 2019. Mr. Mitchell resigned as President on June 8, 2020. At such time he received a severance package of $50,000. During fiscal year 2020, Mr. Mitchell no longer wanted his 279,406 shares and returned them to the Company for no consideration and then the Company cancelled them. On September 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 to Blake Furlow, Gary Herman, Bart Mitchell and JoyAnn Kenny-Charlton, respectively, as well as a total of cash payments of $85,041. Christopher Rego has been a director since February 5, 2020, and our Chief Executive Officer since May 1, 2020. Prior to his appointment, Mr. Rego purchased an active franchise in California. During the year ended September 30, 2020 the Company recognized royalty revenue from the franchise of $16,650 and recognized marketing fee revenue from the franchise of $829. Total payments made by the franchisee were $7,681. As of September 30, 2020 and 2019 the accounts receivable balance with the franchise was $11,894 and $21,536, respectively and the franchises had deferred revenue balances of $0. John Simento has been a director of the Company since May 19, 2020. Prior to Mr. Rego’s and Mr. Simento’s appointments with the Company, they purchased a Company franchise in the United Arab Emirates (the “UAE”). The Company filed an arbitration complaint against them in December 2019 regarding issues related to opening the franchise. The complaint was resolved by a Settlement Agreement dated February 5, 2020. Under the Settlement Agreement, the Company forgave all back royalty fees through July 2019, equally $18,825, and agreed to defer all other fees until the franchise was able to obtain a business license to operate in the U.A.E., 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 form the UAE 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. Mr. Rego is also the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10, 2020. The term of the agreement is nine months and calls for a development fee of $12,900 per month. During the year ended September 30, 2020 the Company paid seven months payments of $12,900 in accordance with the terms of the agreement and paid an additional $15,700 for additional services, for a total of $106,000. On or about December 6, 2019, Christopher Rego and Rod 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 on February 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 agreeing to pay $10,000 as reimbursement for certain costs that they incurred related to the consent solicitation, the Company agreeing to appoint Mr. Rego and Mr. Whiton to the board, and the Company’s agreeing to appoint Mr. 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. 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 with U.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. 22 The Company adopted the new revenue standard (ASC 606) on October 1, 2018 for contracts with remaining performance obligations as of October 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. 23 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 at September 30, 2020 and 2019 are adequate, but actual write-offs could exceed the recorded allowance. During the years ended September 30, 2020 and 2019 the balance in the allowance for doubtful accounts was approximately $942,000 and $663,000, 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 ended September 30, 2020 and 2019 the balance in the allowance for doubtful notes receivable was approximately $91,000 and $91,000, respectively. Impairment of Property, Plant and Equipment and Goodwill and Other Intangible Assets The Company’s long-lived assets currently consist of property and equipment, and prior to the year ended September 30, 2020 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. 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 U.S. federal and state jurisdictions where the Company is required to file. 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 at September 30, 2020 and 2019, respectively, and has not recognized interest and/or penalties during the years ended September 30, 2020 and 2019, 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 2017 and forward by the U.S. Internal Revenue Service, and the years 2016 and forward for various states. 24 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 In February 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, are required. The new standard was adopted by the Company in fiscal year 2020 but had no impact on the Company’s financial statements as the Company does not have any leases that meet the criteria under this standard. All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable. 25 Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, we are not required to provide the information required by this Item. Item 8. Financial Statements and Supplementary Data Our consolidated financial statements and related notes required by this item are set forth as a separate section of this Report. See Part IV, Item 15 of this Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 26