YUUZOO CORP, experiencing the pain of its accounting practices being misunderstood by the market, sought to give clarity to investors at a recent briefing.
The franchisee model of the business, and YuuZoo's accounting treatment of it, is where investor doubt and criticism are largely weighted.
YuuZoo has 7 franchisees covering 68 markets with core franchisees based in South Africa, United Kingdom, South Korea, Eastern Europe, Mexico and Turkey.
YuuZoo is currently seeking franchisees in India and Southeast Asia as well.
Among other things, YuuZoo provides them with the technology know-how, networks, products and services. YuuZoo develops, maintains, upgrades and hosts the social e-commerce network for each franchisee.
The compensation structure offers a lot of upside for YuuZoo -- if the franchisee does well.
♦ Instead of taking cash as one-time fee, YuuZoo gets paid in the form of the franchisees' equity up to 40%.
♦ YuuZoo will receive 30% of future recurring revenue of the franchisees.
♦ YuuZoo will receive 40% of the remaining 70% of profits of franchisees.
"There is a risk with franchisees and we are very open about it. Yes, not every franchisee will be successful. Some will be fantastically successful and could be worth billions of dollars in the future, some may not," said Mr Zilliacus. "So why would we take a one-time fee of $1 million or $2 million?"
YuuZoo consulted a Big Four firm, for advice on how to account for franchise revenue before adopting the current method. Not surprisingly, as it's accounting norm, revenue is to be recognised at the point when YuuZoo delivered the "goods" to the franchisee.
"That's the only time you can recognise the revenue, not, say, five years later," reiterated Mr Zilliacus.
|♦ Expecting positive cashflow in 2017|
|“We have signed on a number of franchisees, and this is the part of our business that many people don't understand and ask: 'What is the value of these franchisees?' There's a gestation period for developing the product, localise it and launch it. Now we are at the tail-end, after one year.
"Within the next 12 months, we expect to activate all our franchise markets, so this will build a steady stream of income over a period of time. We are expecting to generate positive cashflow in FY2017.”
-- Fred Lim (photo) joined as CFO of YuuZoo on 1 Aug 2016. He was previously CFO of a few other listed companies. Photo by Leong Chan Teik
CFO Fred Lim said that according to accounting standard FRS39, the equity interest from the franchisees is recorded as "assets for sale" based on their fair value at inception.
Subsequently, YuuZoo engages an independent valuer to value the "assets for sale" annually. Any gain or loss is recognised as "other comprehensive income".
"We do everything in line with the accounting standards," said Mr Lim.
Mr Zilliacus added that the independent valuer uses big discount rates in order to be conservative, thus arriving at figures of the order of a few million dollars per franchise instead of hundreds of millions which they could be worth.
"Once they are worth hundreds of millions, we can sell our shares in the franchisees and deliver big dividends to our shareholders."
How will YuuZoo start to enjoy positive operating cashflow from 2017, as CFO Fred Lim guided?
Some franchisees are beginning to contribute revenue in a meaningful amount.
Mr Zilliacus said YuuZoo's platform collects all the revenue (advertising, e-commerce, gaming) that is generated by franchisees.
Then YuuZoo takes its 30% cut before handing over the rest to the franchisees.
(Q: YuuZoo's trade receivables went down in 2Q16, and revenue went up. Why didn't the cash balance go up?
Briefly, the CFO's answer was: A significant part of YuuZoo's revenue is derived from franchise sales which is non-cash in nature. At the same time there was a reduction of S$4.3 million in trade receivables being satisfied by provision of shares in its Mexico franchise company.)