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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including Zip Code)
(Issuer’s telephone number, including area code)
_______________________________________________
(Former name or former address if changed since last report)
Check
whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate
by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: shares of common stock as of February 18, 2022.
CREATIVE LEARNING CORPORATION
FORM 10-Q
Period Ended December 31, 2021
TABLE OF CONTENTS
| Page No. | ||
| PART I | ||
| Item 1. | Condensed Consolidated Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 13 |
| Item 4. | Controls and Procedures | 13 |
| PART II | ||
| Item 1. | Legal Proceedings | 15 |
| Item 1A. | Risk Factors | 15 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
| Item 3. | Defaults Upon Senior Securities | 15 |
| Item 4. | Mine Safety Disclosures | 15 |
| Item 5. | Other Information | 15 |
| Item 6. | Exhibits | 16 |
Unless the context otherwise requires, when we use the words the “Company,” “Creative Learning,” “we,” “us,” “our” or “our Company” in this Form 10-Q, we are referring to Creative Learning Corporation, a Delaware corporation, and its subsidiaries.
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Report” or the “Form 10-Q”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. You should read statements that contain these words carefully because they:
| ● | discuss future expectations; |
| ● | contain projections of future results of operations or financial condition; or |
| ● | state other “forward-looking” information. |
We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed in this Form 10-Q and in our Form 10-K for the year ended September 30, 2021 provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in our forward-looking statements, including among other things:
| ● | the operating and financial results of and our relationships with our franchisees; |
| ● | actions taken by our franchisees that may harm our business; |
| ● | incidents that may impair the value of our brand; |
| ● | our failure to successfully implement our growth strategy; |
| ● | changing economic conditions; |
| ● | our need for additional financing; |
| ● | risks associated with our franchisees; |
| ● | litigation and regulatory issues; |
| ● | our failure to comply with current or future laws or regulations; and |
| ● | The impact of the Coronavirus (COVID-19) pandemic. |
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual future results to differ materially from those projected or contemplated in the forward-looking statements.
All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. You should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this Form 10-Q could have a material adverse effect on us.
ii
PART I
Item 1. Financial Statements
CREATIVE LEARNING CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
| December 31, 2021 | September 30, 2021 | |||||||
| (Audited) | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted Cash (marketing fund) | ||||||||
| Accounts receivable, less allowance for doubtful accounts of approximately $ | ||||||||
| Prepaid commission expense | ||||||||
| Prepaid expense | ||||||||
| Marketing fund receivable | ||||||||
| Notes receivables - current portion, less allowance for doubtful accounts of approximately $ | ||||||||
| Total Current Assets | ||||||||
| Security deposit | ||||||||
| Intangibles | ||||||||
| Right of Use Asset | ||||||||
| Prepaid commission expense - net of current portion | ||||||||
| Property and equipment, net of accumulated depreciation of approximately $ | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| SBA Loan - PPP | ||||||||
| Deferred revenue | ||||||||
| Lease Liability | ||||||||
| Accrued liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Deferred revenue - net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 3) | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred stock, $ par value; shares authorized; -- shares issued and outstanding | ||||||||
| Common stock, $ par value; shares authorized shares issued and shares outstanding as of December 31, 2021; shares issued and shares outstanding as of September 30, 2021 | ||||||||
| Additional paid in capital | ||||||||
| Treasury Stock shares at December 31, 2021 and September 30, 2021, at cost | ( | ) | ( | ) | ||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated unaudited financial statements.
1
CREATIVE LEARNING CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
| For the three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| REVENUES | ||||||||
| Royalty fees | $ | $ | ||||||
| Marketing fund revenue | ||||||||
| Initial franchise fees | ||||||||
| Technology fees | ||||||||
| Merchandise sales | ||||||||
| TOTAL REVENUES | ||||||||
| OPERATING EXPENSES | ||||||||
| Salaries and payroll taxes and stock-based compensation | ||||||||
| Professional, legal and consulting fees | ||||||||
| Bad debt expense | ||||||||
| Other general and administrative expenses | ||||||||
| Franchise commissions | ||||||||
| Franchise training and expenses | ||||||||
| Depreciation and amortization | ||||||||
| General advertising | ||||||||
| Franchise marketing fund expense | ||||||||
| TOTAL OPERATING EXPENSES | ||||||||
| OPERATING INCOME (LOSS) | ( | ) | ||||||
| OTHER INCOME (EXPENSE) | ( | ) | ||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ) | ||||||
| PROVISION FOR INCOME TAXES | ||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | ||||
| NET INCOME PER SHARE | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Basic weighted average number of common shares outstanding | ||||||||
| Diluted weighted average number of common shares outstanding | ||||||||
The accompanying notes are an integral part of the condensed consolidated unaudited financial statements.
2
Creative Learning Corporation
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
(Unaudited)
For the three months ended December 31, 2021
| Treasury Stock | Common stock | Additional Paid-in | Accumulated | Total Stockholder’s Equity | ||||||||||||||||||||||||
| Shares | Value | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, September 30, 2021 (Audited) | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Shares issued for option exercise | — | ( | ) | |||||||||||||||||||||||||
| Stock based compensation | — | |||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, December 31, 2021 | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
For the three months ended December 31, 2020
| Treasury Stock | Common stock | Additional Paid-in | Accumulated | Total Stockholder’s Equity | ||||||||||||||||||||||||
| Shares | Value | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, September 30, 2020 (Audited) | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Net Income (Loss) | — | — | ||||||||||||||||||||||||||
| Balance, December 31, 2020 | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
The accompanying notes are an integral part of the condensed consolidated unaudited financial statements
3
CREATIVE LEARNING CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the three months ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Lease cost, net of repayment | ||||||||
| Bad debt expense | ||||||||
| Stock based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Prepaid commission expense | ||||||||
| Deposits | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities | ||||||||
| Deferred Revenue | ( | ) | ( | ) | ||||
| Accrued marketing fund | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | ( | ) | ( | ) | ||||
| Sale of assets held for sale | ||||||||
| Collection of notes receivable | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities | — | — | ||||||
| Net change in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Stock issued for option exercise | $ | |||||||
| Recognition of lease liability and ROU asset at lease commencement | $ | |||||||
The accompanying notes are an integral part of the condensed consolidated unaudited financial statements.
4
CREATIVE LEARNING CORPORATION
Notes to Condensed Consolidated Unaudited Financial Statements
December 31, 2021
(1) Nature of Organization and Summary of Significant Accounting Policies
Nature of Organization
Creative Learning Corporation (the “Company”) operates wholly owned subsidiaries, BFK Franchise Co., LLC (“BFK”) and SF Franchise Company, LLC (“SF”), under the trade names Bricks 4 Kidz® and Sew Fun Studios™ respectively, that offer children’s enrichment and education franchises. As of December 31, 2021, BFK had 274 global Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 28 Bricks 4 Kidz® master franchises, and 134 Bricks 4 Kidz® sub-franchises operating in 39 countries.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s results for the interim periods that have been included. The results for the three months ended December 31, 2021 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s audited consolidated financial statements and management’s discussion and analysis included in the Company’s annual report on Form 10-K for the year ended September 30, 2021.
Related Parties
The Company has been involved in transactions with related parties. A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
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 more significant estimates and assumptions made by management include allowance for doubtful accounts, the valuation allowance for deferred tax assets, depreciation of property and equipment, amortization of intangible assets, recoverability of long-lived assets and fair market 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.
Cash, Restricted Cash and Cash Equivalents
The Company had restricted cash
of approximately $
Accounts and Note Receivables
The Company reviews accounts and notes receivable periodically for collectability, establishes an allowance for doubtful accounts, and records bad debt expense when deemed necessary. The Company records an allowance for doubtful accounts and notes that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Receivables and notes are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts at December 31, 2021 and September 30, 2021 are adequate, but actual write-offs could exceed the recorded allowance.
5
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, which range from three to forty years. Expenditures for additions and improvements are capitalized, while repairs and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is recorded in the year of disposal.
| Fixed Assets | Useful Life | |
| Equipment | ||
| Furniture and Fixtures | ||
| Software |
Long-Lived Assets
The Company’s long-lived assets consist of property and equipment, and 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.
Accounting for Operating Leases
The Company’s operating
leases consist of a twenty-five month lease (commencing November 1, 2021 through November 1, 2023) for office space at 1637 S. Main
Street, Milpitas, CA 94035. In accordance with ASC 842 – Leases, the Company has recorded a Right-of-Use Asset and Lease
Liability of $
Intangible Asset
The Company records intangible
assets at cost and then amortizes the intangible asset over its useful life. Costs incurred to renew or extend the term of any intangible
assets will be expensed as incurred. During the year ended September 30, 2021 the Company acquired intellectual property consisting of
software and content for $
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value because of the relative short-term maturity of these items and current payment expected. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The Company does not hold or issue financial instruments for trading purposes, nor does it utilize derivative instruments. Notes receivable are recorded at par value less allowance for doubtful accounts. The carrying amount is consistent with fair value based upon similar notes issued to other franchisees.
ASC 825, Financial Instruments, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. |
| Level 2: | Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability. |
| Level 3: | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a recurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
6
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.
Effective October 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 the lesser of marketing amounts earned or expensed; therefore, the Company will recognize amounts received in excess of amounts spent on the balance sheet in the accrued marketing fund liability and will recognize amounts spent in excess of amounts received on the balance sheet in the marketing fund receivable.
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.
Contract Liability – Deferred Revenue
In conjunction with the adoption of ASC 606, effective October 1, 2018 the Company recorded deferred revenue as a contract liability for its initial franchise fees collected and related to contracts with remaining performance obligations. During the three months ended December 31, 2021 the activity in the deferred revenue account was as follows:
| Balance, September 30, 2021 | $ | |||
| Initial franchise fees collected | ||||
| Deferred revenue recognized into revenue | ( | ) | ||
| Balance, December 31, 2021 | ||||
| Current portion | ( | ) | ||
| Deferred revenue, net of current portion | $ |
7
Amounts expected to be recognized into revenue related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2021 were as follows:
| Twelve months ended December 31, 2022 | $ | |||
| Twelve months ended December 31, 2023 | ||||
| Twelve months ended December 31, 2024 | ||||
| Twelve months ended December 31, 2025 | ||||
| Twelve months ended December 31, 2026 and thereafter | ||||
| Total | $ |
Contract Liability / Asset – Accrued Marketing Fund / Marketing Fund Receivable
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 on October 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. The activity in the accrued marketing fund liability account for the three months ended December 31, 2021 was as follows:
| Marketing fund liability (receivable), September 30, 2021 | $ | ( | ) | |
| Marketing fund billings recognized into income | ||||
| Marketing funds recognized into expense | ||||
| Marketing funds advanced by the Company | ( | ) | ||
| Marketing fund liability (receivable), December 31, 2021 | $ | ( | ) |
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. Effective October 1, 2018, the date the Company adopted ASC 606, it 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. During the three months ended December 31, 2021, the activity in the contract asset account was as follows:
| Balance, September 30, 2021 | $ | |||
| Commissions paid | ||||
| Commissions recognized into expense | ( | ) | ||
| Balance, December 31, 2021 | ||||
| Current portion | ( | ) | ||
| Prepaid commission expense, net of current portion | $ |
General Advertising Costs
General advertising costs are expensed
as incurred. The Company incurred general advertising costs for the three months ended December 31, 2021 and 2020 of $
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. Given previous recurring losses, the Company cannot conclude that it is more likely than not that such assets will be realized, therefore a full valuation allowance has been recorded during the three months ended December 31, 2021.
8
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 with the ultimate realization being dependent on generating sufficient taxable income in future years. 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 December 31, 2021 and September 30, 2021 and has not recognized interest and/or penalties during the three months ended December 31, 2021, 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 2015 and forward by the U.S. Internal Revenue Service.
Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
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.
During the three months ended December 31, 2021, the Company issued shares for stock-based compensation valued at $, based on the market value of the Company shares on the grant date, and issued shares upon the cashless exercise of stock options.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Recent accounting pronouncements
All newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
9
(2) Notes and Other Receivables
At December 31, 2021 and September
30, 2021, the Company held certain notes receivable totaling approximately $
(3) Commitments and Contingencies
Litigation
The Company is subject to litigation claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters in accordance with the requirements of GAAP. The Company records litigation accruals for legal matters which are both probable and estimable and for related legal costs as incurred. The Company does not reduce these liabilities for potential insurance or third-party recoveries.
On February 24, 2017, franchisee, Team Kasa, LLC, along with its three owners, filed suit in the Eastern District of New York (Case No. 2:17-cv-01074) against former CEO Brian Pappas and Franventures, as well as four other defendants seeking damages under the New York Franchise Sales Act. The same Plaintiffs also initiated an arbitration proceeding against the Company on the same issues (American Arbitration Association, Case No. 01-17-0001-1968), alleging the Company is jointly and severally liable for damages resulting from the allegations against Mr. Pappas and Franventures. The Company is contesting the allegations and its liability for any damages in the arbitration case. Both cases have been held in abeyance as the parties seek a resolution.
Lease
On October 21, 2021, the Company
leased approximately 2,480 square feet of office space at 1637 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) Related Party Transactions
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 three months ended December 31, 2021 the Company recognized royalty revenue from the franchise of $
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, equaling $
Mr. Rego is also the CEO of Teknowland, a software development
company, with which the Company entered into an agreement on March 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 $
10
During the year ended September 30, 2020, the Company
and Mr. Rego orally agreed that Mr. 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.
Beginning in January 2021, Teknowland began hosting
the Company’s website at a cost of $
On February 12, 2021, the Company, Chris Rego and Teknowland
entered into an agreement under which the parties mutually agreed to terminate the March 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 the E-Learning program developed by Teknowland for the Company. The Company
evaluated the E-Learning program on a trial basis, and elected not to pursue it as a line of business. The Company agreed to pay Teknowland
$
On December 7, 2021, the Company entered into a Sale Agreement with StroomX, LLC (the “Purchaser”), under which the Company agreed to sell all of the Company’s subsidiaries (the “Learning Subsidiaries”) involved in its learning business (the “Learning Business”), as well as any assets of the Learning Business that are not owned by the Learning Subsidiaries, to the Purchaser. In connection with the sale, the Purchaser agreed to pay the Company in cash or stock of the Company at the Purchaser’s election, assume all liabilities of the Learning Business, and to indemnify and hold the Company harmless from any such liabilities. The Purchaser is controlled by Christopher Rego. As of the date of this filing the closing of the sale had not yet occurred.
(5) Acquisition of Assets
On December 7, 2021, the Company, DriveItAway, Inc., a Delaware corporation (“DIA”), and the existing shareholders of DIA executed an Agreement and Plan of Share Exchange (the “Share Exchange Agreement”), under which the Company would acquire all of the issued and outstanding common stock of DIA by issuing one share of Series A Convertible Preferred Stock (the “Series A Preferred”) of the Company for each outstanding share of DIA common stock (the “Share Exchange”). As a result of the Share Exchange, DIA will become a wholly-owned subsidiary of the Company. Each share of Series A Preferred will be convertible into that number of shares of common stock of the Company which would entitle the Series A Preferred holders to 85% of the Company’s common stock, determined on a fully-diluted basis, but prior to any shares issued or issuable as a result of the Financing (as defined below). The exact conversion rate of the Series A Preferred will be determined at closing of the Share Exchange. In addition, each share of Series A Preferred will be entitled to dividends and voting rights on an “as converted” basis with the common stockholders. Upon closing of the Share Exchange, all of the existing members of the board of directors (the “Board”) of the Company have agreed to resign, and John Possumato, Adam Potash and Paul Patrizio will be appointed to the Company’s Board. Upon closing of the Share Exchange, Christopher Rego and Rod Whiton have agreed to resign as officers, and upon their resignation John Possumato will be appointed chief executive officer and Adam Potash will be appointed chief operating officer. Mike Elkin has agreed to remain as chief financial officer of the Company. Closing of the Share Exchange Agreement is subject to a number of conditions, and is expected to occur during 2022, provided that the closing conditions are satisfied or waived.
DIA is the first national dealer focused mobility platform that enables car dealers to sell more vehicles in a seamless way through eCommerce, with its exclusive “Pay as You Go” app-based subscription program. DIA provides a comprehensive turn-key, solutions driven program with proprietary mobile technology and driver app, insurance coverages and training to get dealerships up and running quickly and profitably in emerging online sales opportunities. The company is planning to soon to expand its easy and transparent consumer app ’subscription to ownership’ platform to enable entry level consumers to drive and acquire new electric vehicles.
(6) Subsequent Events
On April 28, 2020, the Company
was granted a loan (the “Loan”) from First Bank of the Lake in aggregate amount of $
The Company performed a review of events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no additional events requiring recognition or disclosure in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Plan of Operation
Overview
Creative Learning Corporation, operating under the trade names of Bricks 4 Kidz® and Sew Fun Studios®, offers educational and enrichment programs to children ages 3 to 13+ through its franchisees (the “Learning Business”). The Company’s business model is to sell franchise territories and collect a one-time franchise fee and subsequent monthly royalty fees from each territory. Through the Company’s franchise business model, which includes a proprietary curriculum and marketing strategy plus a proprietary franchise management tool, the Company provides a wide variety of programs designed to enhance students’ problem solving and critical thinking skills. BFK had 274 global Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 28 Bricks 4 Kidz® master franchises, and 134 Bricks 4 Kidz® sub-franchises operating in 39 countries.
As a result of challenges faced by our Learning Business, in December 2021, our board elected to change the business focus of the Company by entering into the Share Exchange Agreement to acquire DriveItAway, Inc. and a separate agreement to dispose of our Learning Business if the acquisition of DIA closes..” As a result, the following description of our operating results and liquidity may not be representative of our future operating results and liquidity.
Three Months ended December 31, 2021 and 2020
Revenues were $373,990 during the three months ended December 31, 2021, as compared to $757,008 during the three months ended December 31, 2020. The drop in gross revenues in 2021 as compared to 2020 is mainly attributable to a decrease of approximately $143,000 in royalty fees and a decrease of approximately $238,000 in initial franchise fees.
Initial franchise fees were $150,905 during the three months ended December 31, 2021, as compared to $389,004 during the three months ended December 31, 2020, a decline of $238,099. The decrease in initial franchise fees during the three months ended December 31, 2021 was primarily due to fewer new franchise sales due to the COVID-19 pandemic, as well as fewer terminations of existing franchises, which results in the acceleration of deferred franchise revenues.
Royalty fee revenues were $189,147 during the three months ended December 31, 2021 as compared to $331,892 during the three months ended December 31, 2020, a decline of $142,745. Royalty fee revenues decreased as compared to the comparative periods due to the offboarding of franchisees during the year ended September 30, 2021, and the three months ended December 31, 2021, which resulted in fewer franchisees being charged royalties in the current period versus the same period of the prior fiscal year. In addition, royalty fee revenues were lower because of the interruption of normal operation at many franchises because of the COVID-19 pandemic.
Marketing fund revenues were $0 during the three months ended December 31, 2021, as compared to $0 during the three months ended December 31, 2020. The Company had no marketing fund revenue in the current period due to the impact of COVID-19. In particular, due to the impact of the COVID-19 pandemic on the business of our franchisees, we voluntarily elected to cease charging our franchises for marketing fees in March 2020. The Company expects to resume charging franchisees for marketing when they are able to return to normal operations following the COVID-19 pandemic.
Technology fees were $33,938 during the three months ended December 31, 2021, as compared to $36,112 during the three months ended December 31, 2020. Technology fees decreased during the three months ended December 31, 2021 over the comparative prior period due to the impact of the COVID-19 on our franchisees’ operations.
Operating expenses were $386,059 during the three months ended December 31, 2021, as compared to $535,487 during the three months ended December 31, 2020. Operating expenses declined in 2021 as compared to 2020 primarily due to lower franchise commission expense, professional fees and bad debt. Franchise commissions decreased as a result of the offboarding of franchisees in the prior year, which triggered the recognition of prepaid commissions into expense in the prior year. Professional fees decreased due to settlement of litigation cases in the prior year . Bad debt expense decreased due to fewer charge-offs of bad debt as compared to the prior year.
Net income (loss) for the three months ended December 31, 2021 was $(12,372) as compared to $223,467 in the three months ended December 31, 2020. The net loss in the three months ended December 31, 2021 as compared to the net income in the three months ended December 31, 2020 was a result of lower revenues partially offset by lower expenses as discussed in detail above.
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Liquidity and Capital Resources
The Company’s primary source of liquidity is cash generated through operations. As of December 31, 2021, the Company had approximately $279,000 of unrestricted cash, and used cash flow from operations of approximately $72,000 in the three months ended December 31, 2021 . The Company believes it has sufficient cash on hand to cover expenses for the next 12 months, provided the Company operates only 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 Company is dependent upon both franchise sales and royalty fees to continue current business operations and liquidity.
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 the 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.
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 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. 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 in December 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.
Cash funds are used for ongoing operating expenses, the purchase of equipment, and software development.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to us as a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation regarding the three months ended December 31, 2021, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our management concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure.
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Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Changes in Internal Control Over Financial Reporting
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company continues to have the following material weaknesses in internal control:
| ● | We have not established and/or maintained adequately designed internal controls in order to prevent or detect and correct material misstatements to the financial statements, including internal controls related to complex or nonroutine transactions. |
| ● | We lack the necessary accounting resources with sufficient SEC reporting experience, US GAAP knowledge and accounting experience. |
Management believes that despite our material weaknesses, our consolidated financial statements for the quarter ended December 31, 2021 are fairly stated, in all material respects, in accordance with GAAP.
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PART II
Item 1. Legal Proceedings
The discussion of pending legal matters included in Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021 is incorporated herein by reference.
There have been no material changes in legal proceedings since the filing of the Form 10-K.
Item 1A. Risk Factors
For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed under Part II, Item 1A of the Company’s most recent annual report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
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Item 6. Exhibits
Exhibits
| Exhibit No. | Exhibit | |
| 31.1 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. | |
| 32.2 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CREATIVE LEARNING CORPORATION | ||
| Dated: February 22, 2022 | By: | /s/ Mike Elkin |
| Mike Elkin | ||
| Chief Accounting Officer (Principal Financial Officer) | ||
| CREATIVE LEARNING CORPORATION | ||
| Dated: February 22, 2022 | By: | /s/ Rod K. Whiton |
| Rod K. Whiton | ||
| President (Principal Executive Officer) | ||
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