Attached files
| file | filename |
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| EX-31.1 - CERTIFICATION - CREATIVE LEARNING Corp | btwo_ex311.htm |
| EX-31.2 - CERTIFICATION - CREATIVE LEARNING Corp | btwo_ex312.htm |
| EX-32 - CERTIFICATION - CREATIVE LEARNING Corp | btwo_ex321.htm |
| EXCEL - IDEA: XBRL DOCUMENT - CREATIVE LEARNING Corp | Financial_Report.xls |
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended September 30, 2011.
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 000-52883
CREATIVE LEARNING CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 20-445603 | |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S Employer Identification No.) |
| 701 Market, Suite 113, St. Augustine, FL | 32095 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (904) 824-3133
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations 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 filing). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | þ |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): o Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock on March 31, 2011, as quoted on the OTC Bulletin Board, was approximately $7,778,000.
As of December 15, 2011, the Registrant had 11,465,242 issued and outstanding shares of common stock.
Documents Incorporated by Reference: None
PART I
Cautionary Statement Concerning Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. The use of words such as “believes”, “expects”, “anticipates”, “intends”, “plans”, “estimates”, “should”, “likely” or similar expressions, indicates a forward-looking statement.
The identification in this report of factors that may affect the Company’s future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
ITEM 1. BUSINESS
BUSINESS
The Company was formed in March 2006 to design, manufacture and sell chiropractic tables and beds. The Company generated only changing revenue and essentially abandoned its business plan in March 2008.
On July 2, 2010 the Company acquired BFK Franchise Company, LLC, a Nevada limited liability company formed in May 2009, for 9,000,000 shares of the Company’s common stock.
On the July 7, 2010, shareholders holding a majority of the Company’s outstanding common stock approved an amendment to the Company’s Articles of Incorporation changing the name of the Company to Creative Learning Corporation.
Unless otherwise indicated, all references to the Company include the operations of BFK.
BFK, which conducts business under the trade name, BRICKS 4 KIDS®, offers programs designed to teach principles of engineering, architecture and physics to children ages 3-12+ using LEGO® bricks. BFK provides classes (both in school and after school), special events programs and day camps that are designed to enhance and enrich the traditional school curriculum, trigger young children’s lively imaginations and build self-confidence. BFK’s programs foster creativity and provide a unique atmosphere for students to develop problem solving and critical thinking skills by designing and building machines, catapults, pyramids, race cars, buildings and numerous other systems and devices using LEGO® bricks.
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LEGO® Bricks
LEGO® is a line of construction toys manufactured by the LEGO® Group, a privately held company based in Billund, Denmark. The flagship product, LEGO®, consists of colorful interlocking plastic bricks and an accompanying array of gears, minifigures and various other parts. LEGO® bricks can be assembled and connected in many ways to construct such objects as vehicles, buildings, and even working robots. Anything constructed can then be taken apart, and the pieces used to make other objects. The toys were originally designed in the 1940s in Europe and have achieved an international appeal, with an extensive subculture that supports LEGO® movies, games, video games, competitions, and four LEGO® themed amusement parks.
LEGO® pieces of all varieties are a part of a universal system. Despite variation in the design and purpose of individual pieces over the years, each remains compatible in some way with existing pieces. LEGO® bricks from 1958 still interlock with those made in 2010, and LEGO® sets for young children are compatible with those made for teenagers.
Bricks, beams, axles, gears, mini figures, and all other parts in the LEGO® system are manufactured to an exacting degree of precision. When snapped together, pieces must have just the right amount of strength and flexibility mixed together to stick together. They must stay together until pulled apart. They cannot be too easy to pull apart, or the resulting constructions would be unstable; they also cannot be too difficult to pull apart, since the disassembly of one creation in order to build another is part of the LEGO® appeal.
Since it began producing plastic bricks, the LEGO® Group has released thousands of sets themed around a variety of topics including town and city, space, robots, pirates, LEGO® Trains, Racers, Vikings, castles, Bionicle, dinosaurs, holiday locations, scuba diving and undersea exploration, the wild west, the Arctic, airports and miners.
The LEGO® range has expanded to encompass accessory motors, gears, lights, sensors, and cameras designed to be used with LEGO® components. Motors, battery packs, lights and switches are sold under the name Power Functions. The Technics line utilizes newer types of interlocking connections that are still compatible with the older brick type connections. The Technics line can often be motorized with Power Functions.
LEGO® initiated a robotics line of toys called “Mindstorms” in 1998, and has continued to expand and update this range ever since. The product originated from a programmable brick developed at the MIT Media Lab and the name is taken from a paper written by a computer scientist and educator who developed the educational theory of constructionism, and whose research was at times funded by the LEGO® Group.
The programmable LEGO® brick which is at the heart of these robotics sets has undergone several updates and redesigns, with the latest being called the 'NXT' brick, and sold under the brand name of LEGO® Mindstorms NXT 2.0 or 1.5. The set includes sensors that detect touch, light, sound and ultrasonic waves, with several others being sold separately, including an RFID reader. The intelligent brick can be programmed using software available for both Windows and Mac computers, and is downloaded onto the brick via Bluetooth.
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Current Programs Offered by BFK
In-school field trips. One-hour classes during school hours. Classes are correlated to the science for a particular grade level. Teacher guides, student worksheets, and step-by-step instruction are provided. Recommended fees: $5-$8 per student.
After-school classes. One hour, one day a week class held after school. Recommended fees: $10-$15 per class per child, minimum commitment is usually 4 classes.
Pre-school classes. Classes can be held in pre-schools for children of pre-school ages. Recommended fees; $5-$7 per child.
Classes for home-schooled children. Classes can be held in the home of one of the parents of a home-schooled child. Recommended fees: $8-$10 per child.
Camps. Normally 3 hours per day for 5 days. Camps can take place at schools or at other child-related venues. Children use LEGO® bricks to explore various science and math concepts while working in an open, friendly environment. The material covered each session varies depending on students’ ages, experience, and skill level. A new project is built each week. Architectural concepts are taught while assembling buildings, castles and other structures. Instructional content includes concepts of friction, gravity and torque, scale, gears, axles and beams. The curriculum can include the construction of a scaled model of the children’s school or the school mascot. The children work and play with programmable LEGO® bricks along with electric motors, sensors, system bricks, and LEGO® Technic pieces (i.e. gears, axles, and beams). Recommended fees: $125-$150/child. Children go home with a small LEGO® project (cost about $5/child)
Birthday Parties. In the home of the birthday child. Recommended fees: $150 per party up to 10 children. If over 10 children the fee is $10/child.
Special Events. Activities with LEGO® bricks can be held in various locations including church centers, lodges, child-related venues, private schools, pre-schools, etc. Program can include parents, grandparents and all children in the family. Recommended fees: $5 per family.
Operating Units
BFK operates through Corporate Creativity Centers and franchisees.
A Corporate Creativity Center is a store-front location, owned and operated by BFK, where BFK coordinates in school field trips, after school classes, parties, camps and other programs – as well as the retail sales of LEGO® merchandise.
As of December 15, 2011 BFK had:
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1 Corporate Creativity Center in Florida.
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105 franchises in 26 states and 3 foreign countries.
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Franchise Program
A franchisee pays a one-time, non-refundable franchise fee of $24,000 upon the execution of the franchise agreement and is required to pay BFK a royalty of 7% of the amount received from the operation of the franchise.
The franchisee is granted an exclusive territory and a license to use the “Bricks 4 Kidz®” name and trademarks in the franchised territory. The franchisee is required to conform to certain standards of business practices. Each franchise is run as an independent business and, as such, is responsible its operation, including employment of adequate staff.
Franchisees are permitted to assign their franchise provided that BFK receives advance notice of the proposed assignment, the transferee assumes the obligations under the franchise agreement, the transferee meets certain conditions and qualifications, and BFK receives a $5,000 transfer fee.
The term of the franchise is for ten years. BFK has the right to terminate any franchisee in the event of the franchisee’s bankruptcy, a default under the franchise agreement, or other events. The franchisee has the right to renew the franchise for an additional ten years if, at the time of renewal, the franchisee is in good standing and pays a renewal fee in the amount of $5000.
In addition to the $24,000 franchise fee, a franchisee is advised that an additional investment of between $8,000 and $23,000 will be required for such things as equipment and supplies, insurance, marketing and working capital during the start-up phase of the business.
Competition
To the best of BFK’s knowledge, there are no companies franchising a model similar to that of Bricks 4 Kidz®. However, Play-Well Teknologies, with offices in San Anselmeo and Pleasanton, California, offers after-school classes, camps and birthday parties using LEGO® bricks. Vision Education and Media offers after school classes using LEGO® bricks in its office in New York City, NY. In addition, several other small businesses around the country offer after-school classes and vacation camps using LEGO® bricks. These classes and camps are typically held in elementary schools, middle schools and community colleges.
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Government Regulation
The offer and sale of franchises, and the operations of franchises in some respects, are regulated by the Federal Trade Commission and some state governments.
In 1979 the Federal Trade Commission promulgated what became known as the FTC Franchise Rule. The FTC Franchise Rule requires detailed disclosure of a wide variety of information as a condition to selling a franchise, but the rule does not regulate the franchise relationship or require any filing or registration on the part of a franchisor. The FTC Franchise Rule requires that the franchisor provide a disclosure statement or prospectus to each prospective buyer prior to execution of a contract or payment of money relating to the franchise relationship.
However, the FTC Franchise Rule is narrow and does not preempt state law, which often is stricter than the FTC Franchise Rule. As such, numerous states require franchise disclosure documents to be registered with the state authorities, and numerous states regulate the franchise relationship itself.
California, Florida, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin all have franchise statues and regulations which typically require a franchisor to file or register its offering with the state government and to provide all prospective franchisees with the disclosure document.
In these so called “registration states”, state regulatory agencies review the franchisor’s registration application, the franchise disclosure document, the proposed franchise agreement and any other agreements franchisees must sign. State regulators also review the financial condition of the franchisor, the background of the franchisor’s executives and sales agents and provisions regarding the rights and remedies of the franchisor and the franchise as provided in the franchise agreement. These state agencies can deny registration if they believe that the sale of the franchise would be deceptive in any way.
Numerous other states have laws regulating various facets of the relationship between the franchisee and franchisor. These “relationship laws” typically regulate franchisors’ ability to terminate or refuse renewal of a franchise, contain provisions requiring that a franchisor have “good cause” before terminating or refusing to renew a franchise and may also address other issues such as the right of a deceased franchisee’s heirs to continue the franchise after the original investor’s death. Some laws require a franchisor to buy back excess inventory from the franchisee in the even of termination. Some state laws make it illegal for a franchisor to demand a general release from a franchisee as a condition of renewing or entering into a new agreement.
Under the FTC Franchise Rule, the FTC has the authority to seek civil penalties against a franchisor for violations of the FTC Franchise Rule. Each of the “registration states” has similar authority to seek penalties for violations of their requirements. Violations may include the offer or sale of an unregistered franchise, failing to timely provide the disclosure document to a prospective franchisee or making misrepresentations in the franchise disclosure documents. Additionally, officers of the franchisor may have personal liability if they had knowledge of or participated in the violations.
Individuals cannot sue a franchisor for a violation of the FTC Franchise Rule. However, most of the pre-sale disclosure states grant a private right of action for violation of the state statue and have remedies that typically include damages, rescission of the franchise agreement and attorneys’ fees.
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General
The Company’s offices, consisting of approximately 1,100 square feet, are located in an office/condo complex at 701 Market, Suite 113, St. Augustine, FL 32095. The Company purchased this unit in July 2011 for $50,000,
As of December 15, 2011 the Company employed five persons on a full time basis.
The Company’s website is www.bricks4kidz.com.
LEGO® is a registered trademark of the LEGO® Group of companies which do not sponsor, authorize or endorse BFK’s programs or its website.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
See Item 1 of this report.
ITEM 3. LEGAL PROCEEDINGS
BFK Franchise Company vs. Robin Staples CA-11-1595. On September 29, 2011 BFK filed a suit against Robin Staples in the Circuit Court, St. Johns County, Florida. The suit alleges that Robin Staples violated the non-compete clause in an agreement that BFK entered into with Ms. Staples in 2010. BFK has petitioned the court for an injunction against Ms. Staples to enjoin her from operating her competing business.
Robin Staples vs. BFK Franchise Company, LLC, No. 11-2-37615-0 SEA. On October 31, 2011 Robin Staples filed a complaint in the SUPERIOR COURT OF WASHINGTON FOR KING COUNTY against BFK alleging that she did not violate any non-compete with respect to the Staples Agreement that BFK entered into with Ms. Staples in 2010. BFK filed an answer and petitioned the court for a stay until the case in St. Johns County is adjudicated.
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ITEM 4. REMOVED AND RESERVED
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
On November 7, 2008, the Company’s common stock began trading on the OTC Bulletin Board under the symbol “BTWO.” Prior to that date, there was no established trading market for the Company’s common stock.
Shown below is the range of high and low quotations for our common stock for the periods indicated as reported by the OTC Bulletin Board. The market quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.
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Quarter Ending
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High
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Low
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12/31/2009
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$ | 0.65 | $ | 0.65 | ||||
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3/31/2010
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$ | 1.01 | $ | 0.50 | ||||
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6/30/2010
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$ | 2.00 | $ | 1.25 | ||||
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9/30/2010
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$ | 1.75 | $ | 1.05 | ||||
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12/31/2010
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$ | 1.50 | $ | 1.05 | ||||
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3/31/2011
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$ | 1.59 | $ | 1.45 | ||||
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6/30/2011
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$ | 1.65 | $ | 0.95 | ||||
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9/30/2011
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$ | 1.10 | $ | 0.51 | ||||
As of December 15, 2011, the Company had 11,465,242 outstanding shares of common stock and 266 shareholders of record.
Holders of common stock are entitled to receive dividends as may be declared by the Board of Directors. The Company’s Board of Directors is not restricted from paying any dividends but is not obligated to declare a dividend. No dividends have ever been declared and it is not anticipated that dividends will ever be paid.
The Company’s Articles of Incorporation authorize its Board of Directors to issue up to 10,000,000 shares of preferred stock. The provisions in the Articles of Incorporation relating to the preferred stock allow the Company’s directors to issue preferred stock with multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the holders of the Company’s common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders generally, and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by the Company’s management.
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See Item 7 of this report for information concerning shares of the Company’s common stock which have been issued or sold since July 1, 2010.
The Company has relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 with respect to the sale or issuance of these shares of its common stock. The persons who acquired these securities were sophisticated investors and were provided full information regarding the Company’s business and operations. There was no general solicitation in connection with the offer or sale of these securities. The persons who acquired these securities acquired them for their own accounts. The certificates representing these securities bear a restricted legend providing that they cannot be sold unless pursuant to an effective registration statement or an exemption form registration.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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 audited financial statements and notes thereto contained in this report.
Results of Operations
Although from a legal standpoint the Company, on July 2, 2010, acquired BFK Franchise Company, for financial reporting purposes, the acquisition of BFK constituted a recapitalization, and the acquisition was accounted for similar to a reverse merger, with the result that BFK was deemed to have acquired the Company. As a result, the financial statements of the Company included as part of this report represent the activity of BFK from May 19, 2009 (the inception of BFK) to July 2, 2010, and the consolidated activity of BFK and the Company from July 2, 2010 forward. Material changes of items in the Company’s Statement of Operations for the year ended September 30, 2011 as compared to the same period in the prior year are discussed below.
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Increase (I)
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Item
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or Decrease (D)
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Reason
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Revenues
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I
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Growth of business resulting in
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increased sales of franchises and an
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increase in royalties received from
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franchisees.
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Operating Expenses
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I
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Growth in business.
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Liquidity and Capital Resources
Sources and (uses) of funds for the years ended September 30, 2011 and 2010 are shown below:
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Year Ended September 30,
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2011
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2010
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Cash used in operations
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$ | (447,812 | ) | $ | (281,839 | ) | ||
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Purchase of equipment
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(127,156 | ) | (41,743 | ) | ||||
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Loans/(Repayments)
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(200,650 | ) | 200,000 | |||||
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Sale of common stock
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1,266,177 | 93,201 | ||||||
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Cash on hand at beginning of period
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- | 30,381 | ||||||
Subsequent to July 2, 2010, the date the Company acquired BFK Franchise Company, the Company had the following transactions in its common stock:
Between September 2010 and December 2010, the Company sold 55,342 units at a price of $3.00 per unit. Each Unit consisted of four shares of the Company’s common stock and one warrant. Each Warrant entitles the holder to purchase one share of the Company’s common stock at a price of $3.00 per share. The Warrants expire on the earlier of July 31, 2013, or twenty days following written notification from the Company that its common stock had a closing bid price at or above $4.00 for any ten of twenty consecutive trading days. The proceeds from the sale of the Units were used to open a new Corporate Creativity Center in Coral Springs, Florida, as well as for developing the Company’s online Franchise Management Tool (the “FMT”) that is used by franchisees for business management and general and administrative expenses.
On June 24, 2010 the Company borrowed $100,000 from a franchisee. During the three months ended December 31, 2010 this loan was converted into 250,000 shares.
On July 15, 2010 the Company borrowed $100,000 from three persons. During the three months ended December 31, 2010 these loans were converted into 215,902 shares. Of this amount, 62,500 shares had not been issued as of April 15, 2011.
On December 28, 2010 the Company borrowed $10,000 from a franchisee. The loan was repaid on April 2, 2011. In partial consideration for providing this loan, the Company agreed to issue 7,500 shares to the franchisee. Of this amount, 2,500 shares have been issued as of April 15, 2011 and 5,000 shares remain to be issued.
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Between August 1, 2010 and March 1, 2011 the Company issued 35,000 shares for investor relations services.
Between January 1, 2011 and February 1, 2011 the Company issued 100,000 shares to two persons for services rendered.
On January 21, 2011 the Company issued 10,000 shares to an employee for services rendered.
In March 2011 the Company granted a third party an option to purchase up to 667,000 shares at a price of $0.675 per share. The option expires on June 15, 2011. As of April 15, 2011 the option holder had purchased 160,000 shares.
Between April 1, 2011 and April 15, 2011 the Company sold 99,500 shares, at a price of $1.00 per share, to a group of private investors.
In May 2011 the Company issued 50,000 shares of common stock to Dan O’Donnell, the Company’s Vice President of Operations, for services rendered.
On February 27, 2011 the Company borrowed $15,000 from a third party. This loan was repaid on March 22, 2011. In partial consideration for providing this loan, the Company agreed to issue 2,500 shares to the lender. As of December 15, 2011, these shares had not been issued.
Between January 4, 2011 and September 30, 2011 the Company sold 1,026,405 shares of its common stock to private investors. The Company received $951,177 from the sale of these shares.
Except as indicated, none of the shares described above were issued to an officer, director, principal shareholder or an affiliate of the Company.
As of December 15, 2011 the Company’s operating cash requirements were approximately $90,000 per month.
The Company anticipates that its capital requirements for the twelve-month period ending December 31, 2012 will be as follows:
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General and administrative expenses
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$ | 620,000 | ||
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Marketing
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$ | 240,000 | ||
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Business development
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$ | 120,000 | ||
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Opening new Corporate Creativity Centers
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$ | 80,000 |
The Company does not have any commitments or arrangements from any person to provide the Company with any additional capital. The Company may not be successful in raising the capital it needs.
As of December 15, 2011 the Company’s liabilities consisted primarily of trade payables. In October and November 2011, the Company began to generate a positive cash flow from its operations. Notwithstanding the above, there is no assurance the Company’s operations will be profitable or that the Company will continue to generate a positive cash flow.
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Contractual Obligations
The following table summarizes the Company’s contractual obligations as of September 30, 2011:
| 2012 | 2013 | 2014 | Total | |||||||||||||
| Lease of corporate office | $ | 18,000 | - | - | $ | 18,000 | ||||||||||
| Lease of Corporate Creativity Center | $ | 45,000 | 50,928 | 54,526 | $ | 150,454 | ||||||||||
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity or capital resources.
Outlook
Other than as disclosed above, the Company does not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, the Company’s liquidity increasing or decreasing in any material way.
Other than as disclosed above, the Company does not know of any significant changes in its expected sources and uses of cash
Critical Accounting Policies and Recent Accounting Pronouncements
See Note 1 to the Company’s financial statements included as part of this report for a discussion of the Company’s critical accounting policies and recent accounting pronouncements, the adoption of which may have a material effect on the Company’s financial statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements and accompanying notes included as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of management, including the Company’s Principal Financial Officer and Principal Executive Officer, of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report on Form 10-K. Disclosure controls and procedures are procedures designed with the objective of ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, such as this Form 10-K, is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and is communicated to management, including the Company’s Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, management concluded that, as of September 30, 2011, the Company’s disclosure controls and procedures were effective.
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Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive officer and principal financial officer and implemented by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Brian Pappas, the Company’s Principal Executive and Financial Officer, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2011 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2011.
There was no change in internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
In March 2011 Jeff Pappas resigned as an officer of the Company and acquired a franchisee for Las Vegas, Nevada.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company’s officers and directors are listed below. Directors are generally elected at the annual shareholders' meeting and hold office until the next annual shareholders' meeting or until their successors are elected and qualified. Executive officers are elected by Directors and serve at their discretion.
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Name
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Age
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Position
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Brian Pappas
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60
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President, Principal Financial Officer, Principal
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Accounting Officer, Secretary and Director
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Michelle Cote
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43
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Founder and a Director
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Dan O'Donnell
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43
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Vice President of Operations and a Director
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Steven Menscher
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48
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Director
|
Brian Pappas has been an officer and Managing Member of BFK since May 2009. Between 1981 and 1998 Brian Pappas owned and operated (with his brother Jeff), Together Development Corporation, which sold franchises under the trade name “Together Dating Service.” Mr. Pappas and his brother grew Together Development Corporation from 12 franchises to over 175 franchises which were located throughout the US, Canada, England, Netherlands and Germany. After Mr. Pappas sold Together Development Corporation in 1998 he opened Skater Paradise, Inc, which operated a chain of indoor skate parks in Massachusetts. After selling Skater Paradise, Inc in 2004 Mr. Pappas, until April, 2009, provided consulting services, and in some instances acted as the franchise development director for Zen Massage Center, WeekDay Gourmet, Shape up Sisters, Digicom Specialties, The Online Outpost, and Auction-It-Today. In the spring of 2009, Mr. Pappas met with Michelle Cote, the founder of Bricks 4 Kidz®, and together they formed BFK in May 2009. Between 1981 and 1998 Mr. Pappas also co-owned and operated two advertising agencies, Cushing & Pappas and The Thought Process. Mr. Pappas graduated from Colgate University in 1973 with a Bachelor of Arts degree in mathematics and music.
Dan O’Donnell has been an officer and Vice President of Operations of BFK since April 15, 2010. Between October 2009 and his association with BFK, Mr. O’Donnell developed the Franchise Marketing Tool (FMT) for BFK, which is an essential component of the Bricks 4 Kidz® franchise model. Between May 2000 and October 2009 Mr. O’Donnell was the Director of Franchise Operations for The Whole Child Learning Company, a franchisor of children’s educational services, where he was responsible for the oversight of all daily operational activities, franchisee training and ongoing franchisee support. Mr. O’Donnell began his career in 1994 when he developed and launched a computer education program for children called Computer Kids Unlimited in Pittsburgh. Mr. O’Donnell attended the University of Pittsburgh at Titusville between August 1987 and May 1988 and Richard Bland College between August 1988 and May 1990.
15
Michelle Cote co-founded BFK in May 2009 and founded Bricks 4 Kidz® in June, 2008. In her capacity as “founder”, Ms. Cote advises BFK in the areas of creative development and new programs. Ms. Cote developed the Bricks 4 Kidz® concept and since early 2008 has been operating after-school classes, camps and birthday parties using LEGO® bricks. Between 2005 and 2008 Ms. Cote was a free lance architectural draftsman. Prior to that time Ms. Cote worked for an architectural firm in St. Augustine, FL. Ms. Cote received her B.A. degree from Flagler College in St. Augustine in 1991 with a major in Spanish/Latin American studies and graduated Cum Laude.
Steven Menscher was appointed as director of the Company on July 30, 2010. Mr. Menscher is an attorney, a private investor, and an experienced executive specializing in all aspects of start-up companies, including legal, corporate planning and strategic planning. Since 1997, he has been the president of SeCure Files, Inc., an Aspen, Colorado based computer service company, Mr. Menscher has also been of counsel for Rohan Development Corporation of Los Angeles. Mr. Menscher is a graduate of the University of Colorado, Boulder, and the Pepperdine University School of Law.
Brian Pappas, Michele Cote and Dan O’Donnell’s longstanding relationship with the Company benefits the Company and its shareholders and qualifies them to be directors.
Steven Menscher’s experience with development stage companies benefits the Company and its shareholders and qualifies him to be a director.
The Company does not have a compensation committee. The Company’s directors serve as its audit committee.
The Company’s directors are not independent directors as that term is defined in section 803 of the listing standards of the NYSE AMEX. No director is a “financial expert” as that term is defined in the regulations of the Securities and Exchange Commission. The Company does not believe a financial expert is necessary since its revenues for the year ended September 30, 2011 were less than $1,700,000.
The Company has not adopted a Code of Ethics applicable to its principal executive, financial, and accounting officers and persons performing similar functions. The Company does not believe a Code of Ethics is needed at this time since the Company has only three officers.
16
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid or accrued to the Company’s executive officers during the years ended September 30, 2011 and 2010.
| Name and Principal Position | Fiscal Year | Salary (1) | Bonus (2) | Stock Awards (3) | Option Awards (4) | All Other Compensation (5) | Total | ||||||||||||||||||
|
Brian Pappas,
|
2011
|
$ | 157,875 | -- | -- | -- | -- | $ | 157,875 | ||||||||||||||||
|
Principal Executive,
|
2010
|
$ | 75,000 | -- | -- | -- | -- | $ | 75,000 | ||||||||||||||||
|
Financial and
|
|||||||||||||||||||||||||
|
Accounting Officer
|
|||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Michelle Cote,
|
2011
|
-- | -- | -- | -- | $ | 82,300 | $ | 82,300 | ||||||||||||||||
|
Founder
|
2010
|
-- | -- | -- | -- | $ | 70,102 | $ | 70,102 | ||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Dan O’Donnell,
|
2011
|
$ | 109,000 | 50,000 | -- | -- | -- | $ | 159,000 | ||||||||||||||||
|
Vice President of
|
2010
|
$ | 47,150 | -- | -- | -- | -- | $ | 47,150 | ||||||||||||||||
|
Operations
|
|||||||||||||||||||||||||
|
(1)
|
The dollar value of base salary (cash and non-cash) earned.
|
|
(2)
|
The dollar value of bonus (cash and non-cash) earned.
|
|
(3)
|
The fair value of stock issued for services computed in accordance with ASC 718 on the date of grant.
|
|
(4)
|
The fair value of options granted computed in accordance with ASC 718 on the date of grant.
|
|
(5)
|
All other compensation received that we could not properly report in any other column of the table. In the case of Ms. Cote, compensation consists of franchisee training, consulting and support.
|
Long-Term Incentive Plans. The Company does not provide its officers or employees with pension, stock appreciation rights, long-term incentive or other plans.
Employee Pension, Profit Sharing or other Retirement Plans. The Company does not have a defined benefit, pension plan, profit sharing or other retirement plan, although it may adopt one or more of such plans in the future.
17
Compensation of Directors During Year Ended September 30, 2011. The Company does not compensate its directors for acting as such.
Compensation Committee Interlocks and Insider Participation.
The Company’s directors act as its compensation committee. During the year ended September 30, 2011 each director participated in deliberations concerning executive officer compensation.
During the year ended September 30, 2011, none of the Company’s officers was a member of the compensation committee or a director of another entity, which other entity had one of its executive officers serving as one of the Company’s directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table shows, as of December 15, 2011, information with respect to those persons owning beneficially 5% or more of the Company’s common stock and the number and percentage of outstanding shares owned by each Director and officer and by all officers and directors as a group. Unless otherwise indicated, each owner has sole voting and investment powers over their shares of common stock.
| Name and Address | Shares Owned | Percent of Outstanding Shares | ||||||
|
Brian Pappas
|
2,599,000 | (1) | 22.70 | % | ||||
|
701 Market St., Ste. 113
|
||||||||
|
St. Augustine, FL 32095
|
||||||||
|
Michele Cote
|
1,800,000 | (2) | 15.70 | % | ||||
|
701 Market St., Ste. 113
|
||||||||
|
St. Augustine, FL 32095
|
||||||||
|
Dan O’Donnell
|
180,000 | 0.20 | % | |||||
|
701 Market St., Ste. 113
|
||||||||
|
St. Augustine, FL 32095
|
||||||||
|
Steven Menscher
|
137,000 | 1.20 | % | |||||
|
725 Castle Creek Drive
|
||||||||
|
Aspen, CO 81611
|
||||||||
|
(All officers and directors
|
4,716,000 | 41.10 | % | |||||
|
as a group 5 persons)
|
||||||||
|
(1)
|
Shares are held of record by FranVentures, LLC, a limited liability company managed by Mr. Pappas.
|
|
(2)
|
Shares are held of record by MC Logic, LLC, a limited liability company controlled by Ms. Cote.
|
18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
Ronald R. Chadwick, P.C. (“Chadwick”) audited the Company’s financial statements for the year ended September 30, 2010. The following table shows the fees billed to the Company during the periods presented by Chadwick.
| Year Ended September 30, 2011 |
Year Ended September 30, 2010 |
|||||||
|
Audit Fees
|
$ | - | $ |
19,500
|
||||
|
Audit-Related Fees
|
- | $ | 1,500 | |||||
|
|
||||||||
|
Tax Fees
|
- | $ | 2,000 | |||||
|
All Other Fees
|
- | - | ||||||
|
Year Ended
September 30, 2011
|
||||
|
Audit Fees
|
$ | 16,000 | ||
|
Audit-Related Fees
|
- | |||
|
|
||||
|
Tax Fees
|
- | |||
|
All Other Fees
|
- | |||
Audit fees and audit related fees represent amounts billed for professional services rendered for the audit of the Company’s annual financial statements and the reviews of the financial statements included in the Company’s Form 10-Q and Form 10-K reports.
19
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| Exhibits | Page Number | ||
|
3.1.1
|
Certificate of Incorporation
|
(1)
|
|
|
3.1.2
|
Amendment to Certificate of Incorporation
|
(3)
|
|
|
3.1.2
|
Bylaws
|
(1)
|
|
|
10
|
Agreement relating to the acquisition of BFK Franchise Company
|
(2) | |
|
Rule 13a-14(a) Certification
|
|||
| 31.2 |
Rule 13a-14(a) Certification
|
||
|
Section 1350 Certifications
|
|
(1)
|
Incorporated by reference to the same exhibit filed with the Company’s registration statement on Form SB-2, File #333-145999.
|
||
|
(2)
|
Incorporated by reference to Exhibit 10.1 filed with the Company’s report on Form 8-K dated July 2, 2010.
|
||
|
(3)
|
Incorporated by reference to Exhibit 3.1.2 filed with the Company’s report on Form 10-K filed on April 27, 2011.
|
||
20
SIGNATURES
In accordance with Section 13 or 15(a) of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 16th day of January 2012.
| CREATIVE LEARNING CORPORATION | |||
|
|
By:
|
/s/ Brian Pappas | |
| Brian Pappas, Chief Executive Officer | |||
Pursuant to the requirements of the Securities Exchange Act of l934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ Brian Pappas
|
Principal Executive, Financial and
|
January 16, 2012
|
||
|
Brian Pappas
|
Accounting Officer and a Director | |||
|
Director
|
||||
|
Michelle Cote
|
||||
|
/s/ Dan O’Donnell
|
Director
|
January 16, 2012
|
||
| Dan O’Donnell | ||||
| /s/ Steven Menscher | Director | January 16, 2012 | ||
| Steven Menscher |
21
CREATIVE LEARNING CORPORATION
Index to Consolidated Financial Statements
|
Page
|
||
|
Reports of Independent Auditors
|
F-2
|
|
|
Consolidated Balance Sheets at September 30, 2011 and 2010
|
F-3
|
|
|
Consolidated Statements of Operations for the years ended
|
||
|
September 30, 2011 and 2010
|
F-4
|
|
|
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
|
||
|
September 30, 2011 and 2010
|
F-5
|
|
|
Consolidated Statements of Cash Flows for the years ended
|
||
|
September 30, 2011 and 2010
|
F-6
|
|
|
Notes to Consolidated Financial Statements
|
F-8
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Creative Learning Corporation:
We have audited the accompanying consolidated balance sheet of Creative Learning Corporation (“the Company”) as of September 30, 2011 and the related statement of operations, stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in all material respects, the financial position of Creative Learning Corporation, as of September 30, 2011, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States of America.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly, we express no such opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Borgers & Cutler CPA’s PLLC
Borgers & Cutler CPA’s PLLC
Denver, CO
January 17, 2012
F-2
CREATIVE LEARNING CORPORATION
Consolidated Balance Sheets
|
September 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Assets
|
||||||||
|
Current Assets:
|
||||||||
|
Cash
|
$ | 517,830 | $ | 27,271 | ||||
|
Accounts receivable, less allowance for doubtful
|
||||||||
|
accounts of $28,660 and $-0-, respectively
|
89,005 | — | ||||||
|
Other receivables
|
2,118 | — | ||||||
|
Total Current Assets
|
608,953 | 27,271 | ||||||
|
Note receivable from related party (Note 3)
|
10,000 | — | ||||||
|
Property and equipment, net of accumulated depreciation
|
||||||||
|
of $11,280 and $589, respectively (Note 4)
|
157,619 | 41,154 | ||||||
|
Deposits
|
7,619 | 9,819 | ||||||
|
Total Assets
|
$ | 784,191 | $ | 78,244 | ||||
|
Liabilities and Stockholders’ Equity (Deficit)
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable:
|
||||||||
|
Related party (Note 3)
|
$ | 11,100 | $ | 6,250 | ||||
|
Other
|
69,534 | 39,700 | ||||||
|
Payroll accruals
|
4,123 | — | ||||||
|
Notes payable:
|
||||||||
|
Related parties (Note 3)
|
— | 650 | ||||||
|
Other, net of debt discount totaling
|
||||||||
|
$-0- and $19,630, respectively (Note 5)
|
— | 180,370 | ||||||
|
Accrued interest payable
|
— | 6,350 | ||||||
|
Total Current Liabilities
|
84,757 | 233,320 | ||||||
|
Stockholders’ Equity (Deficit) (Notes 6, 7 and 8):
|
||||||||
|
Creative Learning Corporation stockholders' equity:
|
||||||||
|
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
|
||||||||
|
-0- and -0- shares issued and outstanding, respectively
|
— | — | ||||||
|
Common stock, $.0001 par value; 50,000,000 shares authorized;
|
||||||||
|
10,288,575 and 2,581,268 shares issued and outstanding, respectively
|
1,029 | 258 | ||||||
|
Additional paid-in capital
|
1,975,445 | 670,427 | ||||||
|
Retained earnings (deficit)
|
(1,277,040 | ) | (771,027 | ) | ||||
|
Total Creative Learning Corporation stockholders' equity (deficit)
|
699,434 | (100,342 | ) | |||||
|
Noncontrolling interest
|
— | (54,734 | ) | |||||
|
Total Stockholders’ Equity (Deficit)
|
699,434 | (155,076 | ) | |||||
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
$ | 784,191 | $ | 78,244 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-3
CREATIVE LEARNING CORPORATION
Consolidated Statements of Operations
|
For The Years ended
|
||||||||
|
September 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Revenues:
|
||||||||
|
Initial franchise fees
|
$ | 1,467,930 | $ | 476,472 | ||||
|
Royalties and marketing fees
|
109,822 | 21,972 | ||||||
| 1,577,752 | 498,444 | |||||||
|
Operating expenses:
|
||||||||
|
Franchise consulting and commissions:
|
||||||||
|
Related parties (Note 3)
|
303,801 | 247,000 | ||||||
|
Other
|
603,533 | 77,098 | ||||||
|
Franchise training and expenses:
|
||||||||
|
Related parties (Note 3)
|
76,746 | 70,000 | ||||||
|
Other
|
22,251 | 12,149 | ||||||
|
Salaries and payroll taxes
|
287,427 | 85,702 | ||||||
|
Advertising
|
180,774 | 109,229 | ||||||
|
Professional fees
|
182,823 | 40,224 | ||||||
|
Office expense
|
141,363 | 35,429 | ||||||
|
Bad debt expense
|
28,660 | 29,500 | ||||||
|
Depreciation
|
10,691 | 589 | ||||||
|
Stock-based compensation (Note 8)
|
— | 354,643 | ||||||
|
Other general and administrative expenses
|
240,601 | 92,655 | ||||||
|
Total operating expenses
|
2,078,670 | 1,154,218 | ||||||
|
Loss from operations
|
(500,918 | ) | (655,774 | ) | ||||
|
Other income (expense):
|
||||||||
|
Interest income
|
— | 1 | ||||||
|
Interest expense:
|
||||||||
|
Debt discount (Note 5)
|
— | (6,975 | ) | |||||
|
Beneficial conversion feature (Note 5)
|
— | (100,000 | ) | |||||
|
Other
|
(35,653 | ) | (80,370 | ) | ||||
|
Other income
|
30,557 | 10,355 | ||||||
|
Total other income (expense)
|
(5,096 | ) | (176,989 | ) | ||||
|
Loss before provision for income taxes
|
(506,014 | ) | (832,763 | ) | ||||
|
Provision for income taxes (Note 11)
|
— | — | ||||||
|
Net loss
|
(506,014 | ) | (832,763 | ) | ||||
|
Less: net loss attributable to
|
||||||||
|
noncontrolling interest
|
— | 54,734 | ||||||
|
Net loss attributable to
|
||||||||
|
Creative Learning Corporation
|
$ | (506,014 | ) | $ | (778,029 | ) | ||
|
Net loss per share (Creative Learning Corporation):
|
||||||||
|
Basic and diluted
|
$ | (0.10 | ) | $ | (0.43 | ) | ||
|
Weighted average number of common
|
||||||||
|
shares outstanding
|
5,003,405 | 1,793,575 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CREATIVE LEARNING CORPORATION
Consolidated Statement of Stockholders' Equity (Deficit)
|
Equity
|
||||||||||||||||||||||||||||
|
(Deficit) -
|
||||||||||||||||||||||||||||
|
Additional
|
Retained
|
Creative
|
||||||||||||||||||||||||||
|
Common Stock
|
Paid-in
|
Earnings
|
Learning
|
Noncontrolling
|
||||||||||||||||||||||||
|
Shares
|
Par Value
|
Capital
|
(Deficit)
|
Corporation
|
Interest
|
Total
|
||||||||||||||||||||||
|
Balance, September 30, 2009
|
1,557,000 | $ | 156 | $ | 49,844 | $ | 7,003 | $ | 57,003 | $ | — | $ | 57,003 | |||||||||||||||
|
Stock issued for reverse acquisition (Note 2)
|
800,000 | 80 | (26,410 | ) | — | (26,330 | ) | — | (26,330 | ) | ||||||||||||||||||
|
Compensatory warrant issuances (Note 8)
|
— | — | 353,814 | — | 353,814 | — | 353,814 | |||||||||||||||||||||
|
Compensatory stock issuances (Note 6)
|
100,000 | 10 | 141,237 | — | 141,247 | — | 141,247 | |||||||||||||||||||||
|
Paid-in capital - beneficial conversion feature (Note 5)
|
— | — | 58,753 | — | 58,753 | — | 58,753 | |||||||||||||||||||||
|
Common stock sales (Note 6)
|
124,268 | 12 | 93,189 | — | 93,201 | — | 93,201 | |||||||||||||||||||||
|
Net loss for the year ended September 30, 2010
|
— | — | — | (778,029 | ) | (778,029 | ) | (54,734 | ) | (832,763 | ) | |||||||||||||||||
|
Balance, September 30, 2010
|
2,581,268 | 258 | 670,427 | (771,026 | ) | (100,341 | ) | (54,734 | ) | (155,075 | ) | |||||||||||||||||
|
Acquisition of non-controlling interest (Note 1)
|
— | — | (54,734 | ) | — | (54,734 | ) | 54,734 | — | |||||||||||||||||||
|
Common stock sales (Note 6)
|
1,156,734 | 116 | 951,061 | — | 951,177 | — | 951,177 | |||||||||||||||||||||
|
Compensatory stock issuances (Note 6)
|
1,310,573 | 131 | 409,215 | — | 409,346 | — | 409,346 | |||||||||||||||||||||
|
Stock issued under exchange agreement (Note 2)
|
5,240,000 | 524 | (524 | ) | — | — | — | — | ||||||||||||||||||||
|
Net income for the year ended September 30, 2011
|
— | — | — | (506,014 | ) | (506,014 | ) | — | (506,014 | ) | ||||||||||||||||||
|
Balance, September 30, 2011
|
10,288,575 | $ | 1,029 | $ | 1,975,445 | $ | (1,277,040 | ) | $ | 699,434 | $ | — | $ | 699,434 | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CREATIVE LEARNING CORPORATION
Consolidated Statements of Cash Flows
|
For The Years ended
|
||||||||
|
September 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income (loss)
|
$ | (506,014 | ) | $ | (832,763 | ) | ||
|
Adjustments to reconcile net loss to net cash
|
||||||||
|
provided by (used in) operating activities:
|
||||||||
|
Depreciation
|
10,691 | 589 | ||||||
|
Compensatory equity issuances
|
409,346 | 453,814 | ||||||
|
Interest expense - debt discount
|
19,630 | 80,370 | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(89,005 | ) | — | |||||
|
Other assets
|
(9,918 | ) | (9,819 | ) | ||||
|
Accounts payable
|
44,685 | 25,970 | ||||||
|
Accrued liabilities
|
4,123 | — | ||||||
|
Interest payable
|
(6,350 | ) | — | |||||
|
Net cash provided by (used in)
|
||||||||
|
operating activities
|
(122,812 | ) | (281,839 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Property and equipment purchases
|
(127,156 | ) | (41,743 | ) | ||||
|
Loan distributed to a related party in exchange
|
||||||||
|
for a promissory note
|
(10,000 | ) | — | |||||
|
Net cash used in
|
||||||||
|
investing activities
|
(137,156 | ) | (41,743 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from issuance of notes payable
|
— | 200,000 | ||||||
|
Repayment of notes payable
|
(200,650 | ) | — | |||||
|
Proceeds from sale of common stock
|
951,177 | 93,201 | ||||||
|
Net cash provided by
|
||||||||
|
financing activities
|
750,527 | 293,201 | ||||||
|
Net change in cash
|
490,559 | (30,381 | ) | |||||
|
Cash, beginning of period
|
27,271 | 57,652 | ||||||
|
Cash, end of period
|
$ | 517,830 | $ | 27,271 | ||||
|
Supplemental disclosure of cash flow information:
|
||||||||
|
Cash paid during the period for:
|
||||||||
|
Income taxes
|
$ | — | $ | — | ||||
|
Interest
|
$ | — | $ | 625 | ||||
|
Non-cash investing and financing activities:
|
||||||||
|
Common stock issued to extinguish note payable
|
$ | 210,000 | $ | — | ||||
|
Common stock issued as payment for interest
|
$ | 6,341 | $ | — | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CREATIVE LEARNING CORPORATION
Notes to Consolidated Financial Statements
(1) Nature of Organization and Summary of Significant Accounting Policies
Nature of Organization
Creative Learning Corporation (“CLC”), formerly B2 Health, Inc., was incorporated March 8, 2006 in the State of Delaware. BFK Franchise Company LLC (“BFKF”) was formed in the State of Nevada on May 19, 2009. Effective July 2, 2010, CLC was acquired by BFKF in a transaction classified as a reverse acquisition. CLC concurrently changed its name from B2 Health, Inc. to Creative Learning Corporation. The financial statements represent the activity of BFKF from May 19, 2009 forward, and the consolidated activity of BFKF and CLC from July 2, 2010 forward. BFKF and CLC are hereinafter referred to collectively as the "Company". The Company, primarily through franchises, offers educational programs designed to teach principles of engineering, architecture and physics to children using Lego ® bricks. The Company may also engage in any other business that is permitted by law, as designated by the Board of Directors of the Company.
In addition to the accounts of CLC and BFKF, the accompanying consolidated financial statements include the accounts of CLC’s subsidiary, BFK Development Company LLC (“BFKD”) from November 25, 2009 (BFKD’s inception) forward.
BFKF held a 50% ownership interest in BFKD from November 25, 2009 through October 2, 2010. On October 3, 2010, the BFKF acquired the 50% noncontrolling interest in BFKD. Immediately following the acquisition of the noncontrolling interest, BFKF transferred its 100% interest in BFKD to CLC. Because all of the entities (BFKF, BFKD, and CLC) are related parties under common ownership, all transactions among these entities have been recorded within members’ equity.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
Fiscal year
The Company operates on a September 30 fiscal year-end.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles permits 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. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation and to correct prior year errors. The reclassifications did not have any effect on the prior year net loss.
F-7
Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities of three months or less when acquired, to be cash equivalents. We had no cash equivalents at September 30, 2011 and 2010.
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. At September 30, 2011 and 2010, the Company’s allowance for doubtful accounts totaled $28,660, and $-0-, respectively.
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, currently set at five 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.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and current liabilities approximate fair value because of the short-term maturity of these items. 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.
The FASB Accounting Standards Codification (“ASC”) 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.
Long-Lived Assets
In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that may suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair value.
Revenue recognition
Revenue is recognized on an accrual basis after services have been performed under contract terms, the service price to the client is fixed or determinable, and collectibility is reasonably assured.
Initial franchise fees are recognized upon the commencement of operations by the franchisee, which is when the Company has performed substantially all initial services required by the franchise agreement. Any unearned income represents franchise fees received for which the Company has not completed its initial obligations under the franchise agreement. Such obligations generally consist of site location assistance and training. Royalties and marketing fees are recognized as earned.
Advertising costs
Advertising costs are expensed as incurred. The Company incurred advertising costs for the years ended September 30, 2011 and 2010 of $180,774 and $109,229, respectively.
F-8
Income Taxes
The Company accounts for income taxes pursuant to ASC 740. Under ASC 740 deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net loss per share
The net loss per share is computed by dividing the net loss by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share.
Stock-based compensation
The Company accounts for employee and non-employee stock awards under ASC 718, whereby equity instruments issued to employees for services are recorded based on the fair value of the instrument issued and those issued to non-employees are recorded based on the fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable.
Non-controlling interest
A subsidiary of the Company had minority members, representing ownership interests of 50% at September 30, 2010. The Company accounted for this non-controlling interest pursuant to ASC 810-10-65 whereby gains or losses in a subsidiary with a non-controlling interest are allocated to the non-controlling interest based on the ownership percentage of the non-controlling interest, even if that allocation results in a deficit non-controlling interest balance. As discussed above, the minority interest was reduced to 0% on October 3, 2010.
(2) Reverse Acquisition
On July 2, 2010 Creative Learning Corporation entered into an agreement to exchange securities (the "Agreement") with BFK Franchise Company LLC, acquiring 100% of the outstanding membership interests of BFK Franchise Company LLC through the Agreement calling for the issuance of 9,000,000 shares of its common stock. During the years ended September 30, 2011 and 2010, 5,240,000 and 1,557,000 shares were issued under the Agreement, with 2,203,000 shares remaining to be issued as of September 30, 2011. The transaction was accounted for as a reverse acquisition as the members of BFK Franchise Company LLC retained the majority of the outstanding common stock of Creative Learning Corporation after the share exchange. Effective with the Agreement, the Company's stockholders' equity was retroactively recapitalized as that of BFK Franchise Company LLC, while 100% of the net liabilities of Creative Learning Corporation valued at $200,330 consisting of accounts payable of $26,330 and stock subscriptions payable $174,000, were recorded as being acquired in the reverse acquisition for its 713,000 outstanding common shares. The net liabilities acquired of $200,330 combined with the stock value of $962,500 based on market price on the acquisition date led to the Company recognizing goodwill on the transaction of $1,162,880, which was immediately written off. Subsequent to the July 2, 2010 recapitalization, Creative Learning Corporation and BFK Franchise Company LLC remain separate legal entities (with Creative Learning Corporation as the parent of BFK Franchise Company LLC). The accompanying consolidated financial statements exclude the financial position, results of operations and cash flows of Creative Learning Corporation prior to the July 2, 2010. Creative Learning Corporation concurrent with the transaction changed its name from B2 Health, Inc. to Creative Learning Corporation. Effective with the July 2, 2010 Agreement the Company sold its 100% owned subsidiary Back 2 Health, Ltd. to a company related by common control for a nominal fee.
F-9
(3) Related Party Transactions
During the years ended September 30, 2011 and 2010, the Company paid related parties (companies related by common control) for the following expenses:
|
●
|
$303,801 and $247,000, respectively, for franchise consulting and commissions;
|
|
●
|
$76,746 and $70,000, respectively, for franchise training and expenses;
|
As of September 30, 2011, the Company owed related parties $11,100 for franchise commissions and other charges. This liability is reported in the accompanying consolidated financial statements as Accounts payable, related party.
As of September 30, 2010 and 2009, the Company owed a $650 unsecured note payable to a related party that matured in December 2010. The related party forgave the note during the year ended September 30, 2011.
During the year ended September 30, 2011, certain debt holders converted their promissory notes and related accrued interest into shares of CLC common stock (see Note 5).
(4) Property and Equipment
Property and equipment consist of the following:
| 2011 | 2010 | |||||||
| Furniture and fixtures | $ | 42,334 | $ | 31,763 | ||||
| Equipment | 21,200 | 9,980 | ||||||
| Real property | 105,365 | - | ||||||
| 168,899 | 41,743 | |||||||
| Less accumulated depreciation | (11,280 | ) | (589 | ) | ||||
| $ | 157,619 | $ | 41,154 | |||||
Depreciation expense totaled $10,691 and $589, respectively, for the years ended September 30, 2011 and 2010.
(5) Notes Payable
At September 30, 2010, the Company owed $100,000 in unsecured promissory notes outstanding to individuals, to be repaid from proceeds of a private placement offering of the Company’s common stock which was commenced in July 2010, with 1% interest compounded monthly on the outstanding balance. If one of the notes, for $50,000, was not repaid by July 1, 2010, the Company was required to pay $5,000 per month from mid-July 2010 forward, until the note was retired. Pursuant to note terms, the lenders were to also receive 50,000 common shares by June 2010 (which remained due at September 30, 2010); and upon repayment of the note, have the right to purchase 200,000 shares of the Company at $.50 per share. In June 2011, the Company exchanged 125,000 shares of common stock for the $50,000 note and $6,341 in accrued interest (a value of $.45 per share).
At September 30, 2010, the Company also had $100,000 in unsecured convertible notes outstanding to individuals, due in November 2010, with 1% interest compounded monthly on the outstanding balance, convertible at the lender’s election at $.50 per share into 200,000 common shares. Pursuant to note terms, the lenders were to also receive 25,000 common shares by June 2010 and 25,000 shares by August 31, 2010, which remained due at September 30, 2010. The Company recognized a beneficial conversion feature debt discount on the convertible notes of $100,000 (limited to the face amount of the notes), which was allocated $58,753 to paid in capital and $41,247 to stock subscriptions payable. The debt discount is amortized over the lives of the loans. Interest expense from debt amortization in fiscal year 2010 was $80,370, with a remaining debt discount of $19,630 amortized during the year ended September 30, 2011.
During the year ended September 30, 2011, the remaining $150,000 in promissory notes and $13,956 in related accrued interest were converted into 372,902 shares of the Company’s common stock (a value of $.44 per share). As of September 30, 2011, the Company had no promissory notes or accrued interest liabilities outstanding.
F-10
(6) Common Stock Issuances
During the year ended September 30, 2011, the Company sold 1,156,734 shares of its common stock to investors for proceeds totaling $951,177, or $.82 per share.
During the year ended September 30, 2011, the Company issued 1,310,573 shares of its common stock to vendors in exchange for consulting services valued at $409,346, or $.31 per share.
During the year ended September 30, 2010, the Company sold 124,268 shares of its common stock to investors for proceeds totaling $93,201, or $.75 per share.
During the year ended September 30, 2010, the Company issued 100,000 shares of its common stock to vendors in exchange for consulting services valued at $141,247, or $1.41 per share.
(7) Common Stock Commitments
At September 30, 2011, the Company remains committed to issue an additional 2,203,000 common shares pursuant to the July 2, 2010 Securities Exchange Agreement (see Note 2). If all 2,203,000 shares were issued and outstanding, when coupled with the Company’s currently outstanding shares of 10,288,575, the Company would have 12,491,575 common shares outstanding.
(8) Stock Options and Warrants
Non-employee stock options
The Company accounts for non-employee stock options under ASC 718, whereby option costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Unless otherwise provided for, the Company covers option exercises by issuing new shares.
During the year ended September 30, 2010 the Company issued 200,000 common stock purchase options in conjunction with notes payable, allowing the holder to purchase one share of common stock per option, exercisable upon repayment of the notes payable at $.50 per share with an open term. At September 30, 2011, all of these options remained outstanding. The fair value of the option grants were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 2.1 – 2.57%, dividend yield of 0%, expected lives estimated at five years, volatility from 81 - 115%. The Company incurred and recorded compensation expense under the stock options of $-0- and $353,814, respectively, for the years ended September 30, 2011 and 2010.
Also in fiscal year 2010 the Company issued 31,067 common stock purchase warrants as part of $3.00 units sold in an ongoing private placement offering that commenced in July 2010. Each unit contains four shares of common stock and one common stock purchase warrant, with each warrant allowing the holder to purchase one share of common stock, exercisable anytime at the holder’s election at $3.00 per share, through a term expiring July 31, 2013. The value of the sold units has been allocated to the common shares as the warrants were not in the money on the date of sale.
Employee stock options
The Company accounts for employee stock options under ASC 718. Unless otherwise provided for, the Company covers option exercises by issuing new shares. There were no employee stock options issued or outstanding in 2011 and 2010.
F-11
(9) Franchise Operations
The Company currently supports independently owned franchises located in 25 states, 4 Canadian provinces and 4 other countries. Following is a summary of the annual franchise activity:
|
September 30,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Franchises in operation - beginning of year
|
36 | 6 | - | |||||||||
|
Franchises sold during the year
|
42 | 30 | 6 | |||||||||
|
Franchises cancelled, terminated or
|
||||||||||||
|
repurchased during the year
|
(3 | ) | - | - | ||||||||
|
Franchises in operation - end of year
|
75 | 36 | 6 | |||||||||
Franchises are required to pay the Company an initial franchise fee, royalty fees totaling 7% of gross sales, and marketing fees totaling 2% of gross sales.
(10) Commitments and Contingencies
Lease Commitments
The Company entered into an office lease agreement commencing May 1, 2010 and ending April 30, 2015. The office lease calls for monthly rent and operating payments that escalate over the term of the lease. Future minimum rental payments are estimated as follows:
|
September 30,
|
||||||
| 2012 | $ | 42,000 | ||||
| 2013 | 43,000 | |||||
| 2014 | 44,000 | |||||
| 2015 | 25,000 | |||||
| - | ||||||
| $ | 154,000 | |||||
Rent expense was $80,122 and $14,000, respectively, for the years ended September 30, 2011 and 2010.
Contingencies
On September 30, 2011, the Company filed a complaint in St. Johns County, Florida against an individual for breach of contract, breach of a noncompete agreement, and for violating the Florida Uniform Trade Secrets Act. The case is currently in the discovery phase.
The Company entered into a Consent Order with the State of Washington’s Department of Institutions, Securities Division. The Findings of Fact and Conclusions in the Consent Order include:
|
●
|
The Company made unregistered franchise offers and/or sales of a franchise to two Washington residents;
|
|
●
|
The two above offers and/or sales of said franchises were in violation of RCW 19.100.020 because no registration for such offer and/or sale was on file with the Securities Administrator; and
|
|
●
|
The Company did not offer a disclosure document to the two residents.
|
The Company has neither admitted nor denied the findings within the Consent Order. The Company has agreed to comply with the disclosure requirements stipulated by the State of Washington.
The Office of the Attorney General for the State of New York advised the Company that two franchises sold in New York do not meet the requirements for an exemption under the isolated sale rule and will require the Company to enter into an Assurance of Discontinuance and register with the State of New York.
F-12
(11) Income Taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective tax rate is as follows:
|
September 30,
|
|||||||||
|
2011
|
2010
|
||||||||
| U.S. Federal statutory graduated rate | 34.00 | % | 34.00 | % | |||||
| State income tax rate, net of federal benefit | 3.63 | % | 3.63 | % | |||||
| Net operating loss for which no tax benefit is currently available | (37.63 | )% | (37.63 | )% | |||||
|
|
0.00 | % | 0.00 | % | |||||
At September 30, 2011, deferred tax assets consisted of a net tax asset of $483,185, due to operating loss carryforwards of $1,284,043 which was fully allowed for in the valuation allowance of $483,185. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The change in the valuation allowance for the years ended September 30, 2011 and 2010 totaled $190,413 and $292,772, respectively. The current tax benefit also totaled $190,413 and $292,772 for the years ended September 30, 2011 and 2010, respectively. The net operating loss carryforwards begin to expire in the year 2030.
The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required.
Should we undergo an ownership change as defined in the Internal Revenue Code, our net tax operating loss carryforwards generated prior to the ownership change may be subject to an annual limitation, which could reduce or defer the utilization of these losses.
Prior to fiscal year 2010 the Company operated as an LLC, was a pass-through entity for federal income tax purposes, and paid no income tax at the company level.
(12) Going Concern
The Company has suffered a loss from operations and has a working capital deficit and stockholders' deficit, and in all likelihood will be required to make significant future expenditures in connection with continuing marketing efforts along with general administrative expenses. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company may raise additional capital through the sale of its equity securities, through an offering of debt securities, or through borrowings from financial institutions. By doing so, the Company hopes through increased marketing efforts to generate greater revenues from sales of its franchises. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern.
(13) Subsequent Events
We have evaluated the effects of all subsequent events from October 1, 2011 through January 17, 2012, the date the accompanying financial statements were available to be issued.
F-13