Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - CREATIVE LEARNING Corp | e2307_ex32-2.htm |
| EX-32.1 - EXHIBIT 32.1 - CREATIVE LEARNING Corp | e2307_ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - CREATIVE LEARNING Corp | e2307_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - CREATIVE LEARNING Corp | e2307_ex31-1.htm |
| EX-21 - EXHIBIT 21 - CREATIVE LEARNING Corp | e2307_ex21.htm |
| EX-10.5 - EXHIBIT 10.5 - CREATIVE LEARNING Corp | e2307_ex10-5.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-52883
CREATIVE LEARNING CORPORATION
| Delaware | 20-4456503 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
475 W Townplace, Suite A
St. Augustine, FL 32092
(904) 824-3133
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒.
Indicate by check mark whether the registrant (1) has filed all reports required 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 ☐ No ☒.
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. ☒
Indicate by check mark whether the registrant has submitted electronically 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 such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-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 ☐ No ☒.
As of March 31, 2020 (the last trading day of the registrant’s first quarter), the aggregate market value of the common stock held by non-affiliates of the registrant, based on the $.09 closing price of the registrant’s common stock as reported on the OTC bulletin board on that date, was approximately $687,853. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of December 21, 2020, there are 13,298,310 shares of common stock of the registrant outstanding.
TABLE OF CONTENTS
i
Unless the context otherwise requires, when we use the words the “Company,” “Creative Learning,” “CLC” “we,” “us,” “our” or “our Company” in this Form 10-K, we are referring to Creative Learning Corporation, a Delaware corporation, and its subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Report”) 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-K 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-K. 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-K 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-K could have a material adverse effect on us.
ii
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 Company’s business model is to sell franchise territories and collect a one-time franchise fee, renewal fees and 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. As of September 30, 2020, the Company had 451 Bricks 4 Kidz® and Sew Fun Studios® global franchise territories, including 28 Bricks 4 Kidz® master franchises, and 134 Bricks 4 Kidz® sub-franchises operating in 39 countries.
Company Background
The Company was formed in March 2006 under the name B2 Health, Inc. to design, manufacture and sell chiropractic tables and beds. The Company generated only limited revenue and essentially abandoned its business plan in March 2008. In July 2010, the Company’s name was changed to Creative Learning Corporation.
On July 2, 2010, the Company acquired BFK Franchise Company, LLC (“BFK”), a Nevada limited liability company formed in May 2009, under a Stock Exchange Agreement with the members of BFK for 9,000,000 shares of the Company’s common stock. BFK offers a franchise concept known as Bricks 4 Kidz®, a mobile business operated by franchisees within a specific geographic territory offering project-based programs designed to teach principles and methods of engineering to children ages 3-13+. BFK began selling franchises in July 2009.
On January 26, 2015 the Company formed SF Franchise Company, LLC (“SF”) for the purpose of offering a second franchise concept known as Sew Fun Studios®. Sew Fun Studios® is a mobile business operated by franchisees within a specific geographic territory offering creative project-based activities, classes, and programs in fashion and interior design and sewing to children and adults.
During fiscal year 2020, the Company formed B4K eLearning LLC to offer academic programs including access to Stride, an online educational platform that utilizes artificial intelligence to create lesson plans.
In July 2019, the Company entered into an operating agreement for a joint venture known as Bricks4Schoolz, LLC, with BPL Enterprises for Bricks4Schoolz LLC (“BPL”). Under the operating agreement, the joint venture is granted a license to distribute certain intellectual property of the Company through a software system developed by BPL for the joint venture, provided that the joint venture may only distribute the intellectual property to elementary and middle schools in territories which are not covered by an existing franchisee of the Company. The Company has since rescinded its ownership interest in the Bricks4Schoolz, LLC. (See Item 1. Business – Bricks4Schooz).
BFK
BFK franchises, which conduct business under the trade name BRICKS 4 KIDZ®, offer programs designed to teach principles and methods of engineering to children between the ages of 3 and 13 using LEGO® plastic bricks and other LEGO® products through classes, field trips, and other organized activities 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 and other LEGO® products. The Company may provide training and corporate franchisee support to all franchisees and recognizes revenue from the sale of its franchises when all initial training, pursuant to the terms of the franchise agreements, is completed.
BFK franchises are mobile models, with activities scheduled in locations such as preschools, elementary and middle schools, camps, birthday parties, community centers and churches.
1
At September 30, 2020, BFK had 451 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. The following table details franchise activity:
| BFK | ||||
| Franchise Territories | ||||
| September 30, 2018 | 557 | |||
| Additions | 24 | |||
| Terminations and non-renewals and cancellations | (78 | ) | ||
| September 30, 2019 | 503 | |||
| Additions | 15 | |||
| Terminations and non-renewals and cancellations | 67 | |||
| September 30, 2020 | 451 | |||
Current BFK Programs
In-school workshops. One-hour classes during school hours. Classes are correlated to the typical science curriculum for a particular grade level. Teacher guides, student worksheets, and step-by-step instructions are provided.
After-school classes. One hour, one day a week class held after school.
Pre-school classes. Classes can be held in pre-schools for children of pre-school ages.
Classes for home-schooled children. Classes can be held in the home of one of the parents of a home-schooled child.
Camps. Normally three hours per day for five 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 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).
Birthday parties. In the home of the birthday 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.
BFK Franchise Program
BKF sells franchises both domestically and internationally. International sales can be a single franchise or a master franchise, where the master franchisee operates a franchise in the territory, and is also able to develop, sell and manage sub-franchises in the territory under the master franchise agreement. BFK does not offer master franchises in the United States.
Under a franchise agreement, a franchisee pays a one-time, non-refundable franchise fee upon the execution of the franchise agreement. Domestically, there can be variations on the franchise fees depending on the size or territories being purchased, and other factors of the territory. The typical-sized, domestic, single territory franchise fee is $30,000. If the franchisee is granted an additional geographic area to increase the size of their territory, then the franchisee must pay an additional fee. If the franchisee is in good standing and is granted a second or additional franchise, then the franchisee must pay a franchise fee for each additional franchise.
2
International franchise fees vary and are set relative to the potential of the franchised territories. During the fiscal year ended September 30, 2020, BFK sold no master franchises. In the case of a master franchise, BFK receives a percentage of the franchise fee paid to the master franchisee by any sub-franchisee operating in the master franchisee’s territory.
The Company uses a network of franchise marketing and promotion media to contact prospective franchisees. When a potential contact is received, the initial information relating to a buyer is passed to a franchise sales broker or director of business development to initiate contact with the potential new franchisees. The responsibility of the sales broker and/or director of business development is to vet the potential franchisee for compatibility with the franchise concept, among other things. As part of the process of vetting potential franchisees, the Company requires all prospective franchisees to complete a Request for Consideration form. Upon completion of the process the sales broker is paid a commission typically ranging from 20% to 30% of the franchise fee while the director of business development commission ranges between 5% to 7% and the Marketing Director earns 1%.
The franchisee is granted a limited exclusive territory and a license to use the “Bricks 4 Kidz®” name, trademarks and course materials in the franchised territory. The franchisee is required to conform to certain standards of business practices and comply with all applicable laws. Each franchise is run as an independent business and, as such, is responsible for its operation, including employment of adequate staff.
The term of the franchise is for ten years. Subject to any applicable laws, 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 $5,000. During FY2018, the Company, in accordance with FTC Franchise Rule 436.7(a), suspended sales of new franchises in the United States as the Company awaited the completion of its audited financial statements.
Franchise Disclosure Document
Under federal law, the Company is required to (a) prepare a franchise disclosure document (“FDD”) including federally mandated information, (b) provide each prospective franchisee with a copy of the FDD, and (c) wait 14 calendar days before entering into a binding agreement with the prospective franchisee or collecting any payment from any prospective franchisee. Federal law does not regulate the franchise relationship or require any filing or registration of the FDD on the part of a franchisor. The Company is also required to comply with certain state regulations in connection with the offer and sale of franchises, including the requirement to submit the FDD for registration with a number of states before offering or selling franchises within those states. The states requiring registration of the FDD are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. In these states, state regulatory agencies review the FDD to confirm compliance with state statutory requirements. These state agencies can deny registration of the FDD if they determine that the FDD fails to meet state statutory requirements. If a state denies the issuance of an effective registration, a franchisor is prohibited from offering or selling franchises in that state. See "Government Regulation" below for more information.
Royalty and Marketing Fees
The Company invoices all applicable franchisees a royalty fee on a monthly basis based on either a flat fee structure or seven percent of revenue. Every U.S. franchisee, upon signing a franchise agreement, has authorized and provided the required banking information to allow the electronic collection of all fees. Approximately three days after the invoice has been issued to the franchisee, an ACH draft (automatic deduction from the franchisee bank account) for the royalty fee withdrawal is processed through the Company’s banking system. When the Company changes its royalty structure, existing franchisees maintain their contractual franchise royalty rate unless they agree to amend those rates.
3
The following is the royalty fee structure:
| Time Period During the Initial Term of Franchise Agreement | Royalty Fees Amount (U.S. Dollars) (per month) | |||
| October 1, 2016 through September 30, 2017 | $ | 425 USD | ||
| October 1, 2017 through September 30, 2018 | $ | 450 USD | ||
| October 1, 2018 through September 30, 2019 | $ | 475 USD | ||
| October 1, 2019 through September 30, 2020 | $ | 500 USD | ||
| October 1, 2020 and for the remainder of the initial term of the Franchise Agreement | $ | 500 USD | ||
If any franchisee owns and operates more than one territory, the royalty fees payable to the Company for the second territory and each additional territory shall be as follows:
| Time Period During the Initial Term of Franchise Agreement | Royalty Fees Amount (U.S. Dollars) (per month) | |||
| October 1, 2016 through September 30, 2017 | $ | 225 USD | ||
| October 1, 2017 through September 30, 2018 | $ | 250 USD | ||
| October 1, 2018 and for the remainder of the initial term of the Franchise Agreement | $ | 250 USD | ||
4
BFK administers a marketing fund for domestic and Canadian franchisees for the purpose of building brand awareness in their respective countries. The marketing fund expenditures are funded by BFK collecting a 2% marketing fee, based upon gross receipts reported in the Franchise Management Tool (“FMT”), from domestic and Canadian franchisees. The respective franchisees are typically invoiced the middle of each month for the prior month’s receipts. These marketing fee receipts and expenses are reported on the statement of operations on a gross revenue basis, presenting receipts as revenue and expenses as operating expenses. Any receipts that exceed expenditures are recorded as a liability on the balance sheet. The collections of these funds are done using the Company’s ACH program, as agreed to by each franchisee in their Franchise Agreement. The Marketing Fund is segregated into a separate bank account. In April 2018, the third party provider of the FMT restricted the Company’s access to the software. As a result, franchisees were instructed to self-report their marketing fees, however many franchisees did not comply with this request. These past due marketing fees will be addressed once COVID-19 is no longer an issue. During 2020, the Company eased up on collection efforts for the marketing fees due to the impact of the COVID-19.
BFK Competition
Although BFK pioneered the LEGO® modeling-based curriculum for afterschool programs, we believe there are at least two other companies franchising a model similar to that of Bricks 4 Kidz®, Engineering 4 Kids and Snapology. Play-Well Teknologies offers after-school classes, camps and birthday parties using LEGO® bricks. Vision Education and Media offers after school classes using LEGO® bricks in the New York metropolitan area. 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.
Sew Fun Studios
As a result of an unexpectedly lengthy audit process for fiscal year 2018, the Company was unable to sell franchises for a good portion of the year, because the Company’s FDD required audited financial statements. When the audit was completed, the Company focused its efforts on the Bricks4Kidz franchises. Plans for expanding and marketing Sew Fun Studies were placed on hold. At September 30, 2020, SF had 1franchise territory.
Bricks4Schoolz
In July 2019, the Company entered into an operating agreement for a joint venture known as Bricks4Schoolz, LLC, with BPL. Under the operating agreement, the joint venture is granted a license to distribute certain intellectual property of the Company through a software system developed by BPL for the joint venture, provided that the joint venture may only distribute the intellectual property to elementary and middle schools in territories which are not covered by an existing franchisee of the Company. The Company owns 49% of the joint venture, and BPL owns the remaining 51%, and is entitled to a 12% royalty on all gross sales generated by the joint venture. In addition, BPL is the exclusive manager of the joint venture, and in that capacity has sole control of the joint venture. BPL is responsible contributing all capital required by the joint venture, and is entitled to recoup all of its capital contributions before any profits or distributions are allocable to the Company’s interest. Due to disputes regarding the scope of the license, and the fact that neither Bricks4Schoolz, LLC or BPL were legal entities at the time the operating agreement was executed, the Company has rescinded the operating agreement. As of December 28, 2020, the Company has not contributed any capital to Bricks4Schoolz, LLC, and Bricks4Schoolz, LLC has not generated any revenues.
Franchising Process
Initial contact between a potential franchisee and the Company may result from a potential franchisee contacting the Company, either by phone or electronically. Potential franchisees may also be introduced to the Company by brokers and/or other parties, and the Company may pay commissions and consulting fees to the brokers. The Company has discontinued its previous practice of introducing franchisee candidates to third party financing sources to cover franchising expenses, as well as, paying commissions and consulting fees to the Company’s directors and officers.
After initial contact, one of the Company’s franchise consultants and/or internal sales personnel interviews each prospective franchisee (the “candidate”) to determine whether the candidate may make a successful franchisee. If the franchise consultant determines that the candidate may make a successful franchisee, the candidate submits a request for consideration (“RFC”). The Company reviews the RFC, and if the RFC is approved, the franchise consultant continues the vetting process, which focuses on financial and other factors.
5
Upon receipt of the RFC, the candidate is emailed a copy of the Company’s franchise disclosure document. The franchise consultant reviews the franchise disclosure document with the candidate and answers any questions concerning the franchise and the franchise agreement. The Company does not provide projections of a franchise’s financial model or performance to prospective franchisees
Assuming the candidate has cleared the initial vetting process and remains interested in operating one of the Company’s franchises, the candidate is invited to attend a “discovery day” held at the Company’s headquarters, or in some instances at another location, during which representatives of the Company and the candidate meet face to face. If the Company decides that the candidate meets its objectives for the franchise, the required disclosure waiting period has expired and the candidate wants to move forward and become a franchisee, the parties execute a franchise agreement.
The Company will sell a franchise for a particular territory only when the Company has a reasonable belief that the potential franchisee meets the Company minimum criteria. If a franchisee is not successful, the Company may terminate the franchise agreement by providing notice to the franchisee or repurchasing the franchise from the franchisee. Until the Company provides a notice of termination or repurchases the franchise and terminates the franchise by mutual agreement, the Company considers the franchise to be active.
Government Regulation
The offer and sale of franchises is regulated by the Federal Trade Commission (the “FTC”) and some state governments.
In 1979, the FTC promulgated what became known as the FTC Franchise Rule. The FTC Franchise Rule requires that the franchisor provide a FDD to each prospective franchisee prior to execution of a binding franchise agreement or payment of money by the prospective franchisee. The FTC Franchise Rule does not regulate the franchise relationship or require any filing or registration on the part of a franchisor.
However, the FTC Franchise Rule does not preempt state law and, as a result, states may (and, some have) impose additional requirements on franchisors. For example, the following states require franchisors (i) to register their franchise offerings (or qualify for an exemption) with the state prior to the offer and sale of franchises in the state, and (ii) subject to certain exemptions, to provide all prospective franchisees with a registered FDD prior to the offer and sale of a franchise in the state: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin (the “Franchise Registration States”). The registration process is not uniform in each Franchise Registration State. Most Franchise Registration States require the franchisor to submit an application, which includes a FDD, in order to register to sell franchises within that state. Many, but not all, of the state regulatory agencies in the Franchise Registration States review the franchisor’s registration application, the FDD, the proposed franchise agreement and any other agreements franchisees must sign, the financial condition of the franchisor, and other material information provided by the franchisor in its application. These state agencies have the authority to deny a franchisor’s application for registration and prohibit the franchisor from offering or selling franchises in the state.
In addition, there are numerous states that have laws that regulate the relationship between a franchisor and a franchisee after the sale of the franchise.
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 Franchise Registration States has similar authority to seek penalties for violations of their state franchise registration and disclosure laws. Violations may include offering or selling an unregistered franchise, failing to timely provide the disclosure document to a prospective franchisee or making misrepresentations in the FDDs. Additionally, officers, directors and individuals with management responsibility for the franchisor may have personal liability for violations of franchise laws if they had knowledge of (or should have had knowledge of) or participated in the violations.
There is no direct, private right of action for a violation of the FTC Franchise Rule. However, most of the Franchise Registration States provide for a private right of action for a violation of the state’s franchise registration and disclosure law. Remedies available under these laws typically include damages, rescission of the franchise agreement and attorneys’ fees.
6
On January 29, 2016, the Company temporarily suspended domestic franchise offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in compliance with FTC Franchise Rule, Section 436.7(a) due to delay in completion of the Company’s fiscal year 2015 consolidated audited financial statements. In turn, this delayed completion of the Company’s 2016 FDDs for the Bricks 4 Kidz® and Sew Fun Studios® franchise offerings. The Company restarted selling efforts of Bricks 4 Kidz in September of 2016. This temporary suspension of domestic franchise offer and sales did not affect the Company’s international franchise offer and sales activity or its royalty fee collections from existing franchisees. The Company has also currently temporarily suspended domestic franchise offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in compliance with FTC Franchise Rule, Section 436.7(a) due to delay in completion of the Company’s fiscal year 2018 consolidated audited financial statements. In turn, this delayed completion of the Company’s 2018 and 2019 FDDs for the Bricks 4 Kidz® and Sew Fun Studios® franchise offerings.
General
During fiscal 2020, the Company sold its two properties in Florida and transitioned to a Boise, Idaho location for which a new office lease was signed at 5995 W State Street Suite B, Garden City, ID 83703.
On November 1, 2020 the company relocated its office to an office complex located 475 W Townplace, Suite, A, St Augustine, FL 32092.
At September 30, 2020, the Company had six full-time employees and two part-time employees.
Available Information
We make available free of charge on our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or (the “SEC”). Our corporate website is www.creativelearningcorp.com. The information in this website is not a part of this report.
7
Ownership of our securities involves a high degree of risk. Holders of our securities should carefully consider the following risk factors and the other information contained in this Form 10-K, including our historical financial statements and related notes included herein. The following discussion highlights some of the risks that may affect future operating results. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our businesses operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our common stock to decline, perhaps significantly, and you may lose part or all of your investment. Please see “Cautionary Notes Regarding Forward-Looking Statements.”
Risks Related to Our Business
Our recorded revenues increased in fiscal year 2020 as compared to fiscal year 2019
Our reported revenues decreased significantly in fiscal year 2020 to approximately $3,038,000 from $4,518,000 in the prior year, a decrease of approximately $1,480,000 or 33%, primarily due to the acceleration of deferred revenues in 2019, and franchisees that were provided a discount by the Company due to the impact of the COVID-19 pandemic on their operations. While the company experienced slightly lower master franchise sales, through a series of cost cutting measures, the Company was able to generate a profit in all four quarters of the reporting year. Should we begin to incur losses or be unable to reverse its decline in revenues, our ability to attract new franchisees and maintain positive working relationships with our current franchisees may be impaired. In addition, if we incur losses, we may need to seek additional financing which could be dilutive to our stockholders.
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, such as malls and shopping centers. Among the precautions has been the closure of a substantial portion of the schools in the United States, which will adversely impact our royalty revenue from franchisees and our ability to sell new franchises. There is significant uncertainty around the breadth and duration of these school closures and other business disruptions related to COVID-19, as well as its impact on the U.S. and global economy. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. We have asked our corporate employees whose jobs allow them to work remotely to do so for the foreseeable future. Such precautionary measures could create operational challenges as we adjust to a remote workforce, which could adversely impact our business.
Our financial results are affected by the operating and financial results of and our relationships with our franchisees.
A substantial portion of our revenues come from royalties, which have been generally based on a percentage of our franchisees’ revenues. As a result, our financial results have been largely dependent upon the operational and financial results of our franchisees. Negative economic conditions, including inflation, increased unemployment levels and the effect of decreased consumer confidence or changes in consumer behavior, could materially harm our franchisees’ financial condition, which would cause our royalty and other revenues to decline and materially and adversely affect our results of operations and financial condition as a result. In addition, if our franchisees fail to renew their franchise agreements, stop operating their franchise business or enter into a termination agreement with the Company, these revenues may decrease, which in turn could materially and adversely affect our results of operations and financial condition. In part to support franchisee growth and financial planning and to enrich relations with our franchisees, we altered its royalty fee structure beginning and effective October 1, 2015 to change it to a fixed monthly charge on an escalating scale over five years.
Our franchisees could take actions that harm our business.
Our franchisees are independent third party business owners who are contractually obligated to operate in accordance with the operational and other standards set forth in the franchise agreement. Although we engage in a thorough screening process when reviewing potential franchisee candidates, we cannot be certain that our franchisees will have the business acumen or financial resources necessary to operate successful franchises in their approved territories. In addition, certain state franchise laws may limit our ability to terminate, not renew or modify these franchise agreements. As independent business owners, the franchisees oversee their own daily operations. As a result, the ultimate success and quality of any franchise rests with the franchisee. If franchisees do not successfully operate in a manner consistent with required standards and comply with local laws and regulations, franchise fees and royalties paid to us may be adversely affected and our brand image and reputation could be harmed, which in turn could adversely affect our results of operations and financial condition.
8
Moreover, although we believe we generally maintain positive working relationships with our franchisees, disputes with franchisees could damage our brand image and reputation and our relationships with our franchisees, generally.
Our success depends substantially on the value of our brand.
Our success is substantially dependent upon our ability to maintain and enhance the value of our brand, the customers of our franchisees’ connection to our brand and a positive relationship with our franchisees. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to the way we manage our relationships with our franchisees, our growth strategies, our development efforts or the ordinary course of our, or our franchisees’, businesses. Other incidents that could be damaging to our brand may arise from events that are or may be beyond our ability to control, such as:
| ● | actions taken (or not taken) by one or more franchisees or their employees relating to health, safety, welfare or otherwise; |
| ● | data security breaches or fraudulent activities associated with our and our franchisees’ electronic payment systems; |
| ● | litigation and legal claims; |
| ● | third-party misappropriation, dilution or infringement of our intellectual property; and |
| ● | illegal activity targeted at us or others. |
Consumer demand for our products and services and our brand’s value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our products or services, which would likely result in fewer sales of our products and services and, ultimately, lower royalty revenue, which in turn could materially and adversely affect our results of operations and financial condition.
If we fail to successfully implement our growth strategy, our ability to increase our revenues and net income could be adversely affected.
Our growth strategy relies in large part upon new business development by existing and new franchisees. Our franchisees face many challenges in growing their businesses, including:
| ● | availability and cost of financing; |
| ● | securing required domestic or foreign governmental permits and approvals; |
| ● | trends in new geographic regions and acceptance of our products and services; |
| ● | competition with competing franchise systems; |
| ● | employment, training and retention of qualified personnel; and |
| ● | general economic and business conditions. |
In particular, because the majority of our business development is funded by franchisee investment, our growth strategy is dependent on our franchisees’ (or prospective franchisees’) ability to access funds to finance such development. If our franchisees (or prospective franchisees) are not able to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in business development, and our future growth could be adversely affected.
Our growth strategy also relies on our ability to identify, recruit and enter into franchise agreements with a sufficient number of qualified franchisees. In addition, our ability and the ability of our franchisees to successfully expand into new markets may be adversely affected by a lack of awareness or acceptance of our brand as well as a lack of existing marketing efforts and operational execution in these new markets. To the extent that we are unable to implement effective marketing and promotional programs and foster recognition and affinity for our brand in new markets, our franchisees may not perform as expected and our growth may be significantly delayed or impaired. In addition, franchisees may have difficulty securing adequate financing, particularly in new markets, where there may be a lack of adequate history and brand familiarity. Our franchisees’ business development efforts may not be successful, which could materially and adversely affect our business, results of operations and financial condition.
9
Our future growth could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.
Our future growth may place significant demands on our administrative, operational, financial and other resources. Any failure to manage growth effectively could seriously harm our business. To be successful, we will need to continue to implement management information systems and improve our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, legal, human resources, risk management, marketing, technology, sales and operations functions. These processes are time-consuming and expensive, increase management responsibilities and divert management attention, and we may not realize a return on our investment in these processes. Our failure to successfully execute on our planned expansion could materially and adversely affect our results of operations and financial condition.
Changing economic conditions, including unemployment rates, may reduce demand for our products and services.
Our revenues and other financial results are subject to general economic conditions. Our revenues depend, in part, on the number of dual-income families and working single parents who require child development or educational services. A deterioration of general economic conditions, including a soft housing market and/or rising unemployment, may adversely impact us because of the tendency of out-of-work parents to diminish or discontinue utilization of these services. Finally, there can be no assurance that demographic trends, including the number of dual-income families in the workforce, will continue to lead to increased demand for our products and services.
We may require additional financing to execute our business plan and fund our other liquidity needs.
We currently have no revolving credit facility or other committed source of recurring capital. While the company is currently on positive financial footing, should an economically catastrophic event transpire, and if we are unable to increase our revenues or decrease our operating expenses from recent historical run-rate levels, we expect that we would need to obtain additional capital to fund our planned operations. Should our cash flows from operations not meet or exceed our projections, we may need to pursue one or more alternatives, such as to:
| ● | reduce or delay planned capital expenditures or investments in our business; |
| ● | seek additional financing or restructure or refinance all or a portion of our indebtedness at or before maturity; |
| ● | sell assets or businesses; |
| ● | sell additional equity; or |
| ● | curtail our operations. |
Any such actions may materially and adversely affect our future prospects. In addition, we cannot ensure that we will be able to raise additional equity capital, restructure or refinance any of our indebtedness or obtain additional financing on commercially reasonable terms or at all.
Any long-term indebtedness we may incur could adversely affect our business and limit our ability to expand our business or respond to changes, and we may be unable to generate sufficient cash flow to satisfy our debt service obligations.
We currently have no outstanding debt, other than the current liabilities reflected in the accompanying consolidated financial statements. We may incur indebtedness in the future. Any long-term indebtedness we may incur and the fact that a substantial portion of our cash flow from operating activities could be needed to make payments on this indebtedness could have adverse consequences, including the following:
| ● | reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities, and other purposes; |
| ● | limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, which would place us at a competitive disadvantage compared to our competitors that may have less debt; |
| ● | limiting our ability to borrow additional funds; |
| ● | increasing our vulnerability to general adverse economic and industry conditions; and |
| ● | failing to comply with the covenants in our debt agreements could result in all of our indebtedness becoming immediately due and payable. |
10
Our ability to borrow any funds needed to operate and expand our business will depend in part on our ability to generate cash. Our ability to generate cash is subject to the performance of our business as well as general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. If our business does not generate sufficient cash flow from operating activities or if future borrowings are not available to us in amounts sufficient to enable us to fund our liquidity needs, our operating results, financial condition, and ability to expand our business may be adversely affected. Moreover, our inability to make scheduled payments on our debt obligations in the future would require us to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity
We are subject to a variety of additional risks associated with our franchisees.
Our franchise business model subjects us to a number of risks, any one of which may impact our royalty revenues collected from our franchisees, may harm the goodwill associated with our brand, and may materially and adversely impact our business and results of operations.
Bankruptcy of franchisees. A franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s franchise agreement(s). In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise agreement(s) pursuant to Section 365 under the U.S. bankruptcy code, in which case there would be no further royalty payments from such franchisee, and we may not ultimately recover those payments in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.
Franchisee changes in control. Our franchises are operated by independent business owners. Although we have the right to approve franchise owners, and any transferee owners, it can be difficult to predict in advance whether a particular franchise owner will be successful. If an individual franchise owner is unable to successfully establish, manage and operate its business, the performance and quality of its service could be adversely affected, which could reduce its sales and negatively affect our royalty revenues and brand image. Although our franchise agreements prohibit “changes in control” of a franchisee without our prior consent as the franchisor, a franchise owner may desire to transfer a franchise. In addition, in any transfer situation, the transferee may not be able to successfully operate the business. In such a case the performance and quality of service could be adversely affected, which could also reduce its sales and negatively affect our royalty revenues and brand image.
Franchisee insurance. Our franchise agreements require each franchisee to maintain certain insurance types and levels. Losses arising from certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material adverse effect on a franchisee’s ability to satisfy its obligations under its franchise agreement or other contractual obligations, which could cause a franchisee to terminate its franchise agreement and, in turn, negatively affect our operating and financial results.
Some of our franchisees are operating entities. Franchisees may be natural persons or legal entities. Our franchisees that are operating companies (as opposed to limited purpose entities) are subject to business, credit, financial and other risks, which may be unrelated to the operation of their franchise businesses. These unrelated risks could materially and adversely affect a franchisee that is an operating company and its ability to service its customers and maintain its operations while making royalty payments, which in turn may materially and adversely affect our business and operating results.
Franchise agreement termination; nonrenewal. Each franchise agreement is subject to termination by us as the franchisor in the event of a default, generally after expiration of applicable cure periods, although under certain circumstances a franchise agreement may be terminated by us upon notice without an opportunity to cure. Our right to terminate franchise agreements may be subject to certain limitations under any applicable state relationship laws that may require specific notice or cure periods despite the provisions in the franchise agreement. The default provisions under the franchise agreements are drafted broadly and include, among other things, any failure to meet operating standards and actions that may threaten the licensed intellectual property. Moreover, a franchisee may have a right to terminate its franchise agreement in certain circumstances.
11
In addition, each franchise agreement has an expiration date. Upon the expiration of a franchise agreement, we or the franchisee may, or may not, elect to renew the franchise agreement. If the franchise agreement is renewed, the franchisee will receive a “successor” franchise agreement for an additional term. Such option, however, is contingent on the franchisee’s execution of our then-current form of franchise agreement (which may include increased royalty revenues, marketing fees and other fees and costs), the satisfaction of certain conditions and the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing conditions, the expiring franchise agreement will terminate upon expiration of its term. Our right to elect to not renew a franchise agreement may be subject to certain limitations under any applicable state relationship laws that may require specific notice periods or “good cause” for non-renewal despite the provisions in the franchise agreement.
Franchisee litigation; effects of regulatory efforts. We and our franchisees are subject to a variety of litigation risks, including, but not limited to, customer claims, personal injury claims, litigation with or involving our relationship with franchisees, litigation alleging that the franchisees are our employees or that we are the co-employer of our franchisees’ employees, employee allegations against the franchisee or us of improper termination and discrimination, landlord/tenant disputes and intellectual property claims, among others. Each of these claims may increase costs, reduce the execution of new franchise agreements and affect the scope and terms of insurance or indemnifications we and our franchisees may have. In addition, we and our franchisees are subject to various regulatory enforcement actions regarding among other things franchise and employment laws, such as: failure to comply with franchise registration and disclosure requirements; the provision to prospective franchisees of business projections; efforts to categorize franchisors as the co-employers of their franchisees’ employees; legislation to categorize individual franchised businesses as large employers for the purposes of various employment benefits; and other legislation or regulations that may have a disproportionate impact on franchisors and/or franchised businesses. These changes may impose greater costs and regulatory burdens on franchising, and negatively affect our ability to sell new franchises.
Franchise agreements and franchisee relationships. Our franchisees develop and operate their business under terms set forth in our franchise agreements. These agreements give rise to long-term relationships that involve a complex set of mutual obligations and mutual cooperation. We have a standard set of franchise agreements that we typically use with our franchisees, but various franchisees have negotiated specific terms in these agreements. Furthermore, we may from time to time negotiate terms of our franchise agreements with individual franchisees or groups of franchisees (e.g., a franchisee association). We seek to have positive relationships with our franchisees, based in part on our common understanding of our mutual rights and obligations under our agreements, to enable both the franchisees’ business and our business to be successful. However, we and our franchisees may not always maintain a positive relationship or always interpret our agreements in the same way. Our failure to have positive relationships with our franchisees could individually or in the aggregate cause us to change or limit our business practices, which may make our business model less attractive to our franchisees or our members.
While our franchisee revenues are not concentrated among one or a small number of parties, the success of our business is significantly affected by our ability to maintain contractual relationships with profitable franchisees. A typical franchise agreement has a ten-year term. If we fail to maintain or renew our contractual relationships on acceptable terms, or if one or more significant franchisees were to become insolvent or otherwise were unwilling to pay amounts due to us, our business, reputation, financial condition and results of operations could be materially adversely affected.
Our business is subject to various laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, could adversely affect our business.
We are subject to the FTC Franchise Rule promulgated by the FTC that regulates the offer and sale of franchises in the United States and that requires us to provide to all prospective franchisees certain mandatory disclosure in a FDD. In addition, we are subject to state franchise sales laws in 14 states that regulate the offer and sale of franchises by requiring us to make a franchise filing and, in some instances, or obtain approval by the state franchise agency of that filing prior to our making any offer or sale of a franchise in those states and to provide a FDD to prospective franchisees in accordance with such laws. We are also subject to franchise laws in certain provinces in Canada, which, like the FTC Franchise Rule, require presale disclosure to prospective franchisees prior to the sale of a franchise. We must also comply with international laws, including franchise laws, in the countries where we have franchise operations or conduct franchise offer and sales activities. Failure to comply with such laws may result in a franchisee’s right to rescind its franchise agreement and to seek damages, and may result in investigations or actions from federal or state franchise authorities, civil fines or penalties, and stop orders, among other remedies. We are also subject to franchise relationship laws in approximately 24 states that regulate many aspects of the franchisor-franchisee relationship, including renewals and terminations of franchise agreements, franchise transfers, the applicable law and venue in which franchise disputes must be resolved, discrimination and franchisees’ right to associate, among others. Our failure to comply with such franchise relationship laws could result in fines, damages, restitution and our inability to enforce franchise agreements where we have violated such laws. Our non-compliance with federal and state franchise laws could result in liability to franchisees and regulatory authorities (as described above), inability to enforce our franchise agreements, required rescission of franchise agreements and a reduction in our anticipated royalty revenue, which in turn may materially and adversely affect our business and results of operating.
12
We and our franchisees are also subject to the Fair Labor Standards Act of 1938, as amended, and various other laws in the United States and foreign countries governing such matters as minimum-wage requirements, overtime and other working conditions. A significant number of our and our franchisees’ employees are paid at rates related to the U.S. federal minimum wage, and past increases in the U.S. federal minimum wage have increased labor costs, as would future increases. Any increases in labor costs might result in our and our franchisees inadequately staffing stores. Such increases in labor costs and other changes in labor laws could affect franchisee performance and quality of service, decrease royalty revenues and adversely affect our brand.
We have identified material weaknesses in our internal controls over financial reporting in the past.
If our remedial measures are insufficient to address the material weakness or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, we may be unable to accurately report our financial results, or report them within the required timeframes, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results in the future, which could cause investors and others to lose confidence in our financial statements, limit our ability to raise capital and could adversely affect our reputation, results of operations and consolidated financial condition.
The markets for our services are competitive, and we may be unable to compete successfully.
The markets for our services are competitive, and we may be subject to increased competition in our markets in the future. We expect existing competitors and new entrants into the markets where we do business to constantly revise and improve their business models in light of challenges from us or other companies in the industry. If we cannot respond effectively to advances by our competitors, our business and financial performance may be adversely affected. Increased competition may result in new products and services that fundamentally change our markets, reduce prices, reduce margins or decrease our market share. We may be unable to compete successfully against current or future competitors, some of whom may have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do.
Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly in the future.
Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. These fluctuations may cause the market price of our common stock to decline. We base our planned operating expenses in part on expectations of future revenues, and our expenses are relatively fixed in the short term. If revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter. In future periods, our revenue and operating results may be below the expectation of analysts and investors, which may cause the market price of our common stock to decline. Factors that are likely to cause our revenues and operating results to fluctuate include those discussed elsewhere in this section.
We rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, our ability to compete and generate revenues could be harmed.
We rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. Our proprietary rights may not be adequately protected because:
| ● | laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and |
| ● | policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use. |
13
The laws of certain foreign countries may not protect the use of unregistered trademarks or other proprietary rights to the same extent as do the laws of the United States. As a result, international protection of our image may be limited and our right to use our trademarks and other proprietary rights outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for digital signage in foreign countries. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries. Our inability to register our trademarks or other proprietary rights or purchase or license the right to use the relevant trademarks or other proprietary rights in these jurisdictions could limit our ability to penetrate new markets in jurisdictions outside the United States.
Litigation may be necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims by third parties alleging that we infringe, dilute or otherwise violate third-party trademark or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all or prevent us from manufacturing or selling certain products, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in its loss of significant rights.
Other parties may assert intellectual property infringement claims against us, and our products and services may infringe the intellectual property rights of third parties. We may also initiate claims against third parties to defend our intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our core business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Also, we may be unaware of filed patent applications that relate to our products. Parties making infringement claims may be able to obtain an injunction, which could prevent us from operating portions of our business or using technology that contains the allegedly infringing intellectual property. Any intellectual property litigation could adversely affect our business, financial condition or results of operations.
We depend on key executive management and other key personnel, and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
Because of intense competition for our employees and because of other risk factors identified in this report, we may be unable to retain our management team and other key personnel and may be unable to find qualified replacements. All of our key employees are employed on an “at will” basis and we do not have key-man life insurance covering any of our employees. The loss of the services of any of our executive management members or other key personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all.
We could be subject to changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.
We are subject to income taxes in the U.S. and other foreign jurisdictions. Significant judgment is required in determining our tax provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to the examination of our income tax returns, payroll taxes and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes and payroll tax accruals. There can be no assurances as to the outcome of these examinations. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax provisions and payroll accruals. The results of an audit or litigation could have a material effect on our consolidated financial statements in the period or periods for which that determination is made. Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with different statutory tax rates, changes in tax laws, the outcome of income tax audits, and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
14
Risks Related to Our Common Stock
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
As of December 21, 2020, our executive officers, directors, significant shareholders and affiliated persons and entities collectively, beneficially owned approximately 42.5% of our outstanding common stock. As a result, these persons and entities have the ability to exercise control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company that other stockholders may view as beneficial.
Compliance with the Sarbanes-Oxley Act of 2002 will require substantial financial and management resources.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our system of internal controls and, if and when we are no longer a “smaller reporting company,” will require that we have such a system of internal controls audited. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or Stockholder litigation. Any inability to provide reliable financial reports could harm our business. Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities.
We currently are eligible to deregister our Common Stock from SEC reporting requirements.
Upon filing this Form 10-K and Form 10-Q for the subsequent quarter, we will be eligible to deregister our securities from the reporting requirements of the Securities Exchange Act of 1934, as amended as we currently have less than 300 shareholders of record and our Common Stock is not listed on a stock exchange. If our Common Stock is deregistered, it may be more difficult to receive information of the Company which could affect the liquidity of our Common Stock.
Provisions in our charter documents and Delaware law may discourage or delay an acquisition that stockholders may consider favorable, which could decrease the value of our common stock.
Our certificate of incorporation, our bylaws, and Delaware corporate law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors (the “Board”). These provisions include those that: authorize the issuance of up to 10,000,000 shares of preferred stock in one or more series without a stockholder vote. In addition, in certain circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock, though we are not currently subject to this limitation because our Common Stock is not listed on a national securities exchange and we have less than 2,000 stockholders of record.
We have not paid cash dividends to our shareholders and currently have no plans to pay future cash dividends.
We plan to retain earnings to finance future growth and have no current plans to pay cash dividends to shareholders. Any indebtedness that we incur in the future may also limit our ability to pay dividends. Because we have not paid cash dividends, holders of our securities will experience a gain on their investment in our securities only in the case of an appreciation of value of our securities. You should neither expect to receive dividend income from investing in our securities nor an appreciation in value.
Item 1B. Unresolved Staff Comments
Not applicable.
15
On November 1, 2020 the Company leased office space at 475 W Townplace, Suite, A, St. Augustine, FL 32092, for monthly rent of $750, where it maintains its principal office.
In October 2019, the Company signed a 21 month lease for office space at 5995 W State Street Suite B, Garden City, ID 83703, where it previously maintained its principal office. The Company has prepaid rent for the remainder of the lease term at this space, and has no further obligation under the lease.
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 October 2, 2015, the Company filed suit in the state court in St. John’s County, Florida, Case No. CA 15-1076, against its former Chief Executive Officer Brian Pappas, Christine Pappas, its former Human Resources officer, and an independent company controlled by Mr. Pappas named Franventures, LLC (“Franventures”). The lawsuit seeks return of Company emails and other electronic materials in the possession of the defendants, Company control over the process by which the Company’s documents are identified, and a court judgment that the property is the Company’s. Mr. and Mrs. Pappas have returned certain Company documents that they have identified, but other issues remain. On December 11, 2017, Brian Pappas filed a counterclaim alleging the Company is required to indemnify him for a multitude of matters. On October 8, 2020 the Court dismissed Brian Pappas’ indemnity counterclaim without prejudice.
In a separate suit, filed on March 7, 2016 in the state court in St. John’s County, Florida (Case No. CA 16-236), Franventures, LLC (“FV”) filed suit against the Company alleging that it is due an unstated amount of money from the Company pursuant to a contract the Company had previously terminated. On June 23, 2016, the Company filed a counterclaim against Franventures, which also included a complaint against former Chairman of the Board and Chief Executive Officer Brian Pappas. The counterclaim seeks redress for losses and expenditures caused by alleged fraud, conversion of company assets, and breaches of fiduciary duty that the Company alleges that defendants perpetrated upon CLC, including assertions regarding actions by Brian Pappas that the Company alleges occurred while Mr. Pappas was serving as the Chief Executive Officer of CLC and as a member of its board of directors. The Company is actively litigating this matter. On October 27, 2016, Brian Pappas filed a motion to amend the complaint in Case No. CA 16-236 to add a claim alleging that the Company slandered him by virtue of a press release issued on or about August 1, 2016, in which the Company reported to shareholders on steps it had taken and improvements it had implemented. The motion has still not been ruled upon by the Court. If Mr. Pappas granted the right to amend his complaint and does so, the Company will vigorously defend the proposed claim.
The Company’s complaint against Mr. Pappas and Franventures (Case No. CA 15-1076) has been consolidated with Mr. Pappas’ and Franventures’ complaint against the Company (Case No. CA 16-236) for purposes of discovery, but not for any other purpose.
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.
On November 8, 2017, franchisee, Indy Bricks, LLC, along with its two owners, Ben and Kate Schreiber, initiated arbitration against the Company (American Arbitration Association, Case No. 01-17-0006-8120). The Plaintiffs allege breach of contract, fraud, material misrepresentations and omissions, violations of the Indiana Franchise Act, and violations of the Indiana Deceptive Franchise Practices Act. On April 23, 2020, a settlement agreement was entered into between the Plaintiffs and the Company under which the arbitration was dismissed. Pursuant to the settlement agreement, Indy Bricks, LLC will pay the Company an agreed amount of past due franchise fees, monthly marketing and royalty fees, and monthly fees to utilize the Company’s franchise management software.
On December 6, 2019, the Company initiated arbitration against two franchise owners. This case was settled on February 5, 2020.
Item 4. Mine Safety Disclosures
Not applicable.
16
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Price for Equity Securities
Our common stock is quoted on the over the counter market under the symbol “CLCN.” The following table sets forth the quarterly high and low daily close for our common stock for the two years ended September 30, 2019 and 2020. The bids reflect inter dealer prices without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions. There is a very limited market for the Company’s common stock
| Price Range | ||||||||
| High | Low | |||||||
| Year ended September 30, 2019 | ||||||||
| First Quarter | $ | 0.24 | $ | 0.12 | ||||
| Second Quarter | $ | 0.13 | $ | 0.08 | ||||
| Third Quarter | $ | 0.11 | $ | 0.06 | ||||
| Fourth Quarter | $ | 0.07 | $ | 0.06 | ||||
| Year ended September 30, 2020 | ||||||||
| First Quarter | $ | 0.09 | $ | 0.03 | ||||
| Second Quarter | $ | 0.12 | $ | 0.08 | ||||
| Third Quarter | $ | 0.17 | $ | 0.05 | ||||
| Fourth Quarter | $ | 0.34 | $ | 0.10 | ||||
The over the counter market does not impose listing standards or requirements, does not provide automatic trade executions and does not maintain relationships with quoted issuers. A company traded on the over the counter market may face loss of market makers and lack of readily available bid and ask prices for its stock and may experience a greater spread between the bid and ask price of its stock and a general loss of liquidity with its stock. In addition, certain investors have policies against purchasing or holding over the counter market. Both trading volume and the market value of our securities have been, and will continue to be, materially affected by the trading on the over the counter market.
Holders
At December 21, 2020, the Company had 13,298,310 outstanding shares of common stock and 128 shareholders of record.
Dividends
Holders of common stock are entitled to receive dividends as may be declared by the Company’s Board. The Company’s Board 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 be paid in the foreseeable future. Any indebtedness the Company incurs in the future may also limit its ability to pay dividends. Investors should not purchase the Company’s common stock with the expectation of receiving cash dividends.
Recent Sales of Unregistered Securities
We did not issue any securities in unregistered transactions during the fourth quarter of the fiscal year covered by this report.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any securities in the fourth quarter of the fiscal year covered by this report.
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide the information required by this Item.
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K. All information presented herein is based on the Company’s fiscal year, which ends September 30. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Overview
During 2020, the Company experienced a year of decline in the number of active franchises, compared to fiscal year 2019, decreasing from 503 franchise territories to 451, within the two brands. The reduction in the overall number of franchises was to the termination of franchises during the period is the result of the company working to discharge non-performing franchisees from the system, the interruption of sales of new franchises as a result of the Coronavirus (“COVID-19”) pandemic, and the cessation of sales while the Company completed its audit for the fiscal year ended September 30, 2019. The reduction in the growth rate of franchises sold in fiscal year 2020 resulted in a decrease in initial franchise fees of approximately $1,242,000 in a year-to-year comparison.
The Company’s royalty fees revenue decreased to approximately $1,448,000 in fiscal year 2020 from approximately $1,696,000 in the prior year, a decrease of $248,000 (15%), primarily due to an increasing number of non-performing franchisees. Marketing fund revenue decreased approximately $92,000 in the year ended September 30, 2020 primarily due to the impact of COVID-19. Technology fees increased by 87% in the year ended September 30, 2020 due to the Company beginning to charge franchisees for the use of their online platform in the prior year.
Operating expenses remained fairly consistent overall in fiscal year 2020 as compared to fiscal 2019 with a 4% decrease year over year. The Company had net income of approximately $620,000 in fiscal year 2020, down from a net income of approximately $2,018,000 the prior year, a decrease of approximately $1,397,000 primarily due to the acceleration of deferred revenues in 2019, the slowdown in new franchise sales, and franchisees that were provided a discount by the Company due to the impact of the COVID-19 pandemic on their operations.
Results of Operations
The following table represents the Company’s franchise sales activity for the fiscal years ended September 30, 2020 and 2019:
| Franchises Sold | ||||||||
| Fiscal Years Ended | ||||||||
| Franchise Activity | September 30 | |||||||
| Creative Learning Corporation | 2020 | 2019 | ||||||
| BFK Franchise Company LLC | ||||||||
| (a) US/Canada First Territories | 1 | 3 | ||||||
| (b) US/Canada Second Territories | -- | 3 | ||||||
| Total US/Canada | 1 | 6 | ||||||
| International First Territories | - | - | ||||||
| International Second Territories | - | - | ||||||
| Master Agreements | - | - | ||||||
| Master Sub-franchise | 14 | 18 | ||||||
| Total International | -- | 18 | ||||||
| Total BFK | 15 | 24 | ||||||
| SF Franchise Company LLC | ||||||||
| US First Territories | - | - | ||||||
| International Territories | -- | -- | ||||||
| Total SF | -- | -- | ||||||
| Total Franchises Sold | 15 | 24 | ||||||
| (a) | US First Territory refers to the original territory purchased with the Franchise Agreement. |
| (b) | Second Territory refers to a secondary territory purchased in addition to the territory purchased with the Franchise Agreement. |
Material changes of items in the Company’s Statement of Operations for the fiscal year ended September 30, 2020 as compared to the prior year are discussed below.
18
Initial franchise fees, Royalty fees and Merchandise sales
| Fiscal year Ended | ||||||||||||||||||
| (rounded to $1,000) | ||||||||||||||||||
| Item Description | Increase/ Decrease | September 30, 2020 | September 30, 2019 | Amount | Change % | |||||||||||||
| Revenue | ||||||||||||||||||
| Initial franchise fees | Decrease | $ | 1,237,994 | $ | 2,479,921 | $ | (1,241,927 | ) | (50 | )% | ||||||||
| Royalties | Decrease | $ | 1,448,228 | $ | 1,695,788 | (247,560 | ) | (15 | )% | |||||||||
| Marketing fund revenue | Decrease | $ | 130,496 | $ | 222,653 | $ | (92,157 | ) | (41 | )% | ||||||||
| Technology fees | Increase | $ | 221,722 | $ | 118,504 | $ | 103,218 | 87 | % | |||||||||
| Merchandise sales | Decrease | $ | — | 1,098 | $ | (1,098 | ) | (100 | )% | |||||||||
| Total Revenue | Decrease | $ | 3,038,440 | $ | 4,517,964 | $ | (1,479,524 | ) | (33 | )% | ||||||||
The primary cause of the decrease in initial franchise fees was due to the interruption of new franchise sales in fiscal 2020 as a result of the COVID-19 pandemic and delays in completing the Company’s audit for the fiscal year ending September 30, 2019. The primary cause of the decrease in royalties and marketing fund revenue is due to the acceleration of deferred revenues in 2019, fewer franchises paying royalties as a result of the loss of territories during the period from the termination of non-performing franchisees from the system, and the interruption of normal operation at remaining franchises because of the COVID-19 pandemic. Also, due to the impact of the COVID-19 pandemic on the business of our franchisees, we voluntarily elected to cease pursuing collections of our marketing fees from our franchisees in March 2020. The increase in technology fees is the result of the Company beginning to charge franchisees for the use of their online platform in the prior year.
Operating Expenses
Total operating expenses for the comparable periods ended September 30, 2020 and 2019 were approximately $2,453,000 and $2,564,000, respectively, a decrease of approximately $111,000.
| Fiscal Year Ended September 30, | ||||||||||||||||||
| Item Description | Increase/ Decrease | 2020 | 2019 | Amount | Change % | |||||||||||||
| Franchise commissions | Decrease | $ | 288,734 | $ | 605,620 | (316,886 | ) | (52 | )% | |||||||||
| Salaries, payroll taxes & stock-based compensation | Decrease | 613,683 | 884,715 | (271,032 | ) | (31 | )% | |||||||||||
| General marketing expenses | Increase | 81,413 | 21,013 | 60,400 | 287 | % | ||||||||||||
| Franchisee marketing | Decrease | 130,496 | 222,653 | (92,157 | ) | (41 | )% | |||||||||||
| Professional, legal & consulting fees | Increase | 565,996 | 540,196 | 25,800 | 5 | % | ||||||||||||
| Bad debt expense | Increase | 349,794 | (67,018 | ) | 416,812 | (622 | )% | |||||||||||
| All other G&A expenses | Increase | 422,869 | 356,670 | 66,199 | 19 | % | ||||||||||||
| $ | 2,452,985 | $ | 2,563,849 | |||||||||||||||
The changes in significant operating expenses are explained as follows:
Franchise commissions decreased primarily as a result of lower franchise sales.
19
The Company incurred salaries, payroll expenses and stock-based compensation for the fiscal years ended September 30, 2020 and 2019 of approximately $614,000 and $885,000, respectively, a decrease of approximately $271,000, or 31%. The decrease in total payroll expenses is primarily due to the reduction of both employee headcount and remaining salaries.
The Company paid general marketing expenses for the fiscal years ended September 30, 2020 and 2019 of approximately $81,000 and $21,000, respectively, an increase of approximately $60,000, or 287%. The increase related to higher lead advertising expenses.
Franchisee marketing of approximately $130,000 was paid out of the marketing fund using funds collected from franchisees as per the terms of their franchise agreements. These funds were collected and remitted for the cost of national branding of the Company’s concepts to benefit the franchisees. The marketing fund amounts owed to the Company are accounted for as a liability on the balance sheet and the actual collections are deposited into a marketing fund bank account. Expenses pertaining to the marketing fund activities are paid from the marketing fund and reduce the liability account. Upon adoption of FASB 606 on October 1, 2018, the Company presents these revenues on a gross revenue basis on its statement of operations. Any unused funds at the end of the period are recorded on the balance sheet as accrued marketing fees.
The Company paid professional, legal and consulting fees for the fiscal years ended September 30, 2020 and 2019 of approximately $566,000 and $540,000, respectively, an increase of approximately $26,000, or 5%. The increase in professional, legal and consulting fees is primarily due to the higher legal costs incurred in relation to a shareholder proxy solicitation in fiscal 2020, offset by lower audit fees and lower legal costs from ongoing litigation.
The Company recorded an additional reserve for both notes receivable and accounts receivable during the year ended September 30, 2019 due to the slowdown and issues in collections for both types of receivables. During the year ended September 30, 2019 several receivables deemed uncollectible in the prior year were collected causing a credit to bad debt expense. The Company recorded an additional reserve for accounts receivable during fiscal year 2020.
Liquidity and Capital Resources
During the current year, the Company had net income of approximately $620,000 and has sufficient cash on hand to cover expenses for the next 12 months.
The recent COVID-19 outbreak has been declared a pandemic by the World Health Organization, has spread to the United States and many other parts of the world and has adversely affected our business operations, employee availability, financial condition, liquidity and cash flow and the length of such impacts are uncertain.
The outbreak of COVID-19 continues to grow both in the United States and globally, and related government and private sector responsive actions have and will continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.
20
The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating in heavily populated areas, such as malls and shopping centers. Among the precautions has been the closure of a substantial portion of the schools in the United States, which has adversely impacted our royalty revenue from franchisees and our ability to sell new franchises. There is significant uncertainty around the breadth and duration of these school closures and other business disruptions related to COVID-19, as well as its impact on the U.S. and global economy. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. We have asked our corporate employees whose jobs allow them to work remotely to do so for the foreseeable future. Such precautionary measures could create operational challenges, as we adjust to a remote workforce, which could adversely impact our business.
We had cash flows used in operating activities of approximately $306,000 for the year ended September 30, 2020 compared to cash flows provided by operating activities of approximately $398,000 for the year ended September 30, 2019. The decrease in cash flows provided by operating activities for the year ended September 30, 2020 compared to the year ended September 30, 2019 relates primarily to lower initial franchise fees and royalty revenues which resulted in a lower net income.
We had cash flows provided by investing activities of approximately $94,000 for the year ended September 30, 2020 compared to cash flows provided by investing activities of approximately $39,000 for the year ended September 30, 2019. The increase in cash flows provided investing activities was primarily due to lower investments in property and equipment, offset by a reduction in assets held for sale as we contemplated the liquidation of unneeded real estate assets in the 2020 fiscal year. During the fiscal years ended September 30, 2020 and 2019, the Company purchased property and equipment totaling approximately $0 and $119,000, respectively, and no intangible property.
We had cash flows provided by financing activities of approximately $120,000 for the year ended September 30, 2020 compared to cash flows provided by financing activities of $0 for the year ended September 30, 2019. The increase in cash flows provided financing activities was primarily due to receipt of a Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020 in the amount of $119,980 in fiscal 2020. The loan, which was in the form of a note dated April 24, 2020 issued by the Company, matures on April 23, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on October 23, 2020. The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the loan may only be used for payroll costs, cost used to continue group health care benefits, mortgage payments, rent, utilities and interest on other debt obligations incurred before February 15, 2020. The Company used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.
During the first half of fiscal 2020, the Company temporarily suspended domestic franchise offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in compliance with FTC Franchise Rule, Section 436.7(a) due to delays in completion of the Company’s fiscal year 2018 and 2019 consolidated audited financial statements, in the second half of fiscal 2020 the Company’s sales of new franchises was hindered by the COVID-19 pandemic.
The Company is dependent upon both franchise sales and royalty fees to continue current business operations and liquidity.
Contractual Obligations
On November 1, 2020 the Company leased office space at 475 W Townplace, Suite, A, St. Augustine, FL 32092, for monthly rent of $750, where it maintains its principal office.
In October 2019, the Company signed a 21 month lease for office space at 5995 W State Street Suite B, Garden City, ID 83703, where it previously maintained its principal office. The Company has prepaid rent for the remainder of the lease term at this space, and has no further obligation under the lease.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, and results of operations, liquidity or capital resources.
Related Party Transactions
In December 2017, the Company granted a total of 14,286 warrants to two Directors of the Company. These warrants were granted in conjunction with the issuance of standby letters of credit from the two directors. The warrants had an exercise price of $0.14 per share and expired five years from the date of grant. These warrants were valued using the Black Scholes method. The fair value of the warrants on the date of grant were $2,000, and the warrants vested immediately. The Company expensed $2,000 in connection with the grant during the year ended September 30, 2018. These warrants were exercised in September 2019 for 14,286 shares of common stock. The Company agreed to waive the $2,000 exercise price owed in total from these warrant holders.
21
Effective September 30, 2019, Blake Furlow resigned as Chief Executive Officer of the Company. Mr. Furlow received a severance payment of $30,000 pursuant to the terms of a Severance Agreement. Pursuant to his employment agreement, the Company also issued an aggregate of 566,176 shares of Common Stock to Mr. Furlow.
Effective September 30, 2019, Bart Mitchell, the Company’s Chief Financial Officer, was appointed Chief Executive Officer of the Company. In connection with his appointment, Mr. Mitchell entered into an Employment Agreement with the Company as of October 1, 2019 for the term of one year. In addition to cash compensation, he was entitled to receive stock grants valued at the lesser of $15,000 or 200,000 Shares of Common Stock on the last day of the completed year of employment. Mr. Mitchell continued to serve as a member of the Board of Directors of the Company, but no longer served as the Company’s Chief Financial Officer. On September 30, 2019, the Company approved the issuance of 166,667 shares to Mr. Mitchell pursuant to his prior employment agreement for compensation earned during the year ended September 30, 2019. Mr. Mitchell resigned as President on June 8, 2020. At such time he received a severance package of $50,000. During fiscal year 2020, Mr. Mitchell no longer wanted his 279,406 shares and returned them to the Company for no consideration and then the Company cancelled them.
On September 27, 2019, in connection with their service on the Board of Directors for fiscal years 2017, 2018 and 2019, the Company approved the issuance of (i) 99,362, (ii) 272,472, (iii) 112,739 and (iv) 272,472 shares of Common Stock to Blake Furlow, Gary Herman, Bart Mitchell and JoyAnn Kenny-Charlton, respectively, as well as a total of cash payments of $85,041.
Christopher Rego has been a director since February 5, 2020, and our Chief Executive Officer since May 1, 2020. Prior to his appointment, Mr. Rego purchased an active franchise in California. During the year ended September 30, 2020 the Company recognized royalty revenue from the franchise of $16,650 and recognized marketing fee revenue from the franchise of $829. Total payments made by the franchisee were $7,681. As of September 30, 2020 and 2019 the accounts receivable balance with the franchise was $11,894 and $21,536, respectively and the franchises had deferred revenue balances of $0.
John Simento has been a director of the Company since May 19, 2020. Prior to Mr. Rego’s and Mr. Simento’s appointments with the Company, they purchased a Company franchise in the United Arab Emirates (the “UAE”). The Company filed an arbitration complaint against them in December 2019 regarding issues related to opening the franchise. The complaint was resolved by a Settlement Agreement dated February 5, 2020. Under the Settlement Agreement, the Company forgave all back royalty fees through July 2019, equally $18,825, and agreed to defer all other fees until the franchise was able to obtain a business license to operate in the U.A.E., which is currently delayed due to the Coronavirus pandemic. The franchise is currently non-operational as a result of an inability to obtain the issuance of a business license form the UAE due to the Coronavirus pandemic. If the franchise is not able to procure the necessary authorizations to operate, the franchisees would not owe any franchise fees. As a consequence, we have not realized any revenue from the franchise.
Mr. Rego is also the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10, 2020. The term of the agreement is nine months and calls for a development fee of $12,900 per month. During the year ended September 30, 2020 the Company paid seven months payments of $12,900 in accordance with the terms of the agreement and paid an additional $15,700 for additional services, for a total of $106,000.
On or about December 6, 2019, Christopher Rego and Rod Whiton (the “Solicitors”), prior to their appointments as officers or directors of the Company, commenced a consent solicitation to the shareholders of the Company and on February 5, 2020, the Company and the Solicitors entered into an agreement to settle their dispute over the consent solicitation. The settlement resulted in the Company agreeing to pay $10,000 as reimbursement for certain costs that they incurred related to the consent solicitation, the Company agreeing to appoint Mr. Rego and Mr. Whiton to the board, and the Company’s agreeing to appoint Mr. Rego as chief executive officer, among other provisions. The Company ultimately paid a total of $20,000 in costs incurred by Messrs. Rego and Whiton in relation to the consent solicitation.
Critical Accounting Policies
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We describe in this section certain critical accounting policies that require us to make significant estimates, assumptions and judgments. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the consolidated financial statements. For further information on the critical accounting policies, see Note 1 of the Consolidated Financial Statements.
Revenue Recognition
The Company generates almost all of its revenue from contracts with customers. The Company’s franchise agreements enter the parties into a contractual agreement, typically over a ten years term, and include performance obligations as follows: protected territory designation, access to proprietary manuals and handbooks, initial training and on-going assistance, consulting, promotion of goodwill, administration of marketing fund, marketing and promotion items, initial marketing program development assistance, company website access, Franchise Management Tool access, lessons and model plans, project kits, Duplo bricks, frames stop motion animation software, and use of the franchisor’s intellectual property (IP) (e.g., trade name – Bricks for Kidz). Upon entering into a franchise agreement, the Company charges an initial franchise fee, which is fully collectible and nonrefundable as of the date of the signing of the franchise agreement. Further, because the Company’s franchises are primarily a mobile concept and do not require finding locations or construction, the franchisees can begin operations as soon as they complete training.
Per the terms of the franchise agreements, the Company charges for royalty fees on a monthly basis, generally set at a fixed amount, but in some cases are based on a percentage of franchisee’s monthly gross revenues. The Company also charges fees for a marketing fund, generally based on 2% of franchisee’s monthly gross revenues, which is managed by the Company, to allocate towards national branding of the Company’s concepts to benefit the franchisees. Lastly, the Company charges for technology fees on a monthly basis, generally at a fixed amount, for the use of the company Franchise Management tool as well as company emails, etc.
22
The Company adopted the new revenue standard (ASC 606) on October 1, 2018 for contracts with remaining performance obligations as of October 1, 2018. The Company elected to apply the new standard retrospectively with an adjustment to the opening balance of retained earnings as of the date of adoption. Under ASC 606, the Company considers initial franchise fees to be a part of the license of symbolic intellectual property (“IP”), therefore the performance obligation related to these fees is satisfied over time as the Company fulfills its promise to grant the customer rights to use, and benefit from, the Company’s IP, as well as support and maintain the IP. The initial franchise fee, then, is recorded as deferred revenue at inception and recognized on a straight-line basis over the contract term.
In accordance with ASC 606-10-55-65, the Company has determined that the royalty fees, marketing fees, and technology fees are subject to a sales and usage-based royalties’ constraint on licenses of IP. Accordingly, these fees are recognized as revenue at the later of when the sales or usage occurs or the related performance obligation is satisfied. Technology fees are recorded net of processing fees. Marketing fees are limited to marketing amounts expensed; therefore, the Company will recognize amounts received in excess of amounts spent on the balance sheet in the accrued marketing fund liability.
The Company collects transfer fees when contracts are transferred between parties and accounts for the transfer as a contract modification under ASC 606. Because the transfer does not increase the scope of the contract or promise any additional goods or services and there are no new distinct services that will be provided after the transfer the Company considers the transfer fee part of the existing contract. Transfer fees, then, are recorded as deferred revenue at inception and recognized on a straight-line basis over the remaining contract term.
When contracts are terminated due to default, or in conjunction with an early termination agreement, the Company accounts for the early termination as a contract modification under ASC 606. Because the termination eliminates any future performance obligations of the Company any deferred revenue associated with the terminated contract is recognized into revenue at the time of termination, along with any early termination fees, in the initial franchise fee line on the Company’s Statement of Operations.
The Company generates revenue from sales of merchandise where the performance obligation is met, and therefore revenue recognized, upon the delivery of merchandise to the customer.
23
Allowance for Doubtful Accounts — Methodology
Accounts Receivable
The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and considers the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Accounts and receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowances for doubtful accounts at September 30, 2020 and 2019 are adequate, but actual write-offs could exceed the recorded allowance. During the years ended September 30, 2020 and 2019 the balance in the allowance for doubtful accounts was approximately $942,000 and $663,000, respectively.
Notes Receivable
ASC 310, Receivables, provides guidance for receivables and notes that arise from credit sales, loans or other transactions. Financing receivable includes loans and notes receivable. Originated loans we hold for which we have the intent and ability to hold for the foreseeable future or to maturity (or payoff) are classified as held for investment. Financing receivables held for investment are reported in our consolidated balance sheets at the outstanding principal balance adjusted for any write -offs , allowance for loan losses, deferred fees or costs, and any unamortized premiums or discounts. Interest income is accrued on outstanding principal as earned. Unamortized discounts and premiums are amortized using the interest method with the amortization recognized as part of interest income in the consolidated statements of operations. During the years ended September 30, 2020 and 2019 the balance in the allowance for doubtful notes receivable was approximately $91,000 and $91,000, respectively.
Impairment of Property, Plant and Equipment and Goodwill and Other Intangible Assets
The Company’s long-lived assets currently consist of property and equipment, and prior to the year ended September 30, 2020 included intangible assets. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates of asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Income Taxes
The provision for income taxes and deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized.
The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows.
The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at September 30, 2020 and 2019, respectively, and has not recognized interest and/or penalties during the years ended September 30, 2020 and 2019, respectively, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within the next twelve months.
The tax years subject to examination by major tax jurisdictions include the years 2017 and forward by the U.S. Internal Revenue Service, and the years 2016 and forward for various states.
24
Share-based compensation
The Company accounts for employee stock awards for services based on the grant date fair value of the instrument issued and those issued to non-employees are recorded based on the grant date fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable. Stock Awards are expensed over the service period. Forfeitures are recognized as they occur.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, are required. The new standard was adopted by the Company in fiscal year 2020 but had no impact on the Company’s financial statements as the Company does not have any leases that meet the criteria under this standard.
All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and related notes required by this item are set forth as a separate section of this Report. See Part IV, Item 15 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
26
Item 9A. Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures |
Our Principal Executive Officer and Principal Financial Officer conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that in light of the material weaknesses described below, our disclosure controls and procedures were not effective as of September 30, 2020. See material weaknesses discussed below in Management’s Annual Report on Internal Control over Financial Reporting.
| (b) | Management’s Annual Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditure are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As of September 30, 2020, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Our management concluded that our internal controls over financial reporting were not effective as of September 30, 2020 due to the following identified material weaknesses:
| ● | 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 year ended September 30, 2020 are fairly stated, in all material respects, in accordance with GAAP.
| (c) | Changes in Internal Control Over Financial Reporting |
During the fourth quarter of 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
27
Inherent Limitations Over Internal Controls
Management, including our Principal Executive Officer and Principal Financial Officer, does not expect that disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are no resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgements in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.
None.
28
Item 10. Directors, Executive Officers and Corporate Governance Directors and Executive Officers
Our directors and executive officers and their ages at December 21, 2020, are listed in the following table:
| Name | Age | Title | ||
| Christopher Rego | 50 | Director and Chief Executive Officer | ||
| Rod K. Whiton | 51 | Director and President | ||
| JoyAnn Kenny-Charlton | 43 | Director | ||
| John Simento | 59 | Director | ||
| R. Gary Zell, II | 53 | Director | ||
| Mike Elkin | 64 | Chief Financial Officer |
Christopher Rego became a director in February 2020, at which time he also became chief executive officer of BFK Franchise Company, LLC (“BFK”), our principal operating subsidiary. On April 30, 2020, Mr. Rego became Chief Executive Officer of the Company. Mr. Rego has over 20 years of software quality development experience building complex enterprise applications with high-performance requirements in the business-to-business, software-as-a-service, and consumer advertising industries. Mr. Rego is an accomplished corporate strategist and drives the vision and strategic direction of his software company, Teknowland, Inc., and his STREAM education company, Bricknowland, Inc. Mr. Rego has assembled a dedicated team of engineers that focuses on building STREAM education that includes AR/VR learning technology, drones, artificial intelligent education, 3-D printing, coding, and more. Mr. Rego has been the CEO of Teknowland, Inc. since 2013, and the founder and managing partner of Bricknowland, Inc., since 2015. From March 2014 until April 2016, Mr. Rego was Quality Assurance Consulting/Manager at Tibco Software. Mr. Rego has also held various management and architect roles to contribute to the success of rapidly growing technology companies such as Oracle, Yahoo!, Tapjoy, and Intuit. Mr. Rego has been a Bricks 4 Kidz franchisee since November 2013, and has been a partner with Mr. Simento in a Bricks 4 Kidz franchise in the United Arab Emirates since May 2015. Mr. Rego earned a Bachelor of Science degree from Andhra Loyola College in Andhra Pradesh India and an MBA in Marketing and Finance from Acharya Nagarjuna University Andhra Pradesh, India.
Rod K. Whiton became a director in February 2020. On June 2, 2020, Mr. Whiton became the president of the Company. Mr. Whiton has over 20 years of experience managing public and private investments. His experience focuses largely on early stage and turnaround operations in franchising, technology, biometrics, manufacturing, and payment processing. In addition, Mr. Whiton was an early investor in the Company and served as its Interim CEO from July 22, 2015 to May 11, 2017. He has owned and managed a successful private cosmetics company for over 10 years. From October 2016 to the present, Mr. Whiton has been managing member of Trew Pharma LLC, which used to manufacture, markets, and distributes beauty products (but is in the process of winding down operations), and from January 2019 to the present has been CEO of Smart Tires USA LLC, a franchise company that provides a rent-to-own program for tires.
JoyAnn Kenny-Charlton has served as a director of the Company since July 2015. Ms. Kenny-Charlton is an attorney with Fisher Zucker LLC. Ms. Kenny-Charlton concentrates her practice in commercial transactions, general corporate, and franchise, licensing and distribution law. Ms. Kenny-Charlton is a member of the International Franchise Association and has been repeatedly named a “Legal Eagle” by the Franchise Times for her work in the field of franchise law. Ms. Kenny-Charlton is a graduate of Villanova University School of Law and holds a B.A. from Villanova University.
John Simento has served as a director of the Company since May 19, 2020. Mr. Simento is the co-founder and managing partner of Almoe Group of Companies, founded in 1994, Specktron Educational Products, founded in 2011 and Bricknowland founded in 2015. Mr. Simento has over three decades of executive leadership experience managing high-technology and high-growth companies, having been responsible for strategic direction, execution of business plans, technology development, and development of corporate infrastructure. Almoe Group of Companies consists of six divisions, employs over 400 staff spread across four countries, and has over 40 renowned audio visual and IT products and solutions. The Almoe Group of Companies partners with over 55 audio and video and software companies that provide AV and software solutions to retail, corporate, and education institutions. Mr Simento created his own product line, Specktron (www.specktron.com) that is a leading brand pioneering in Audio Visual and Information & Communication Technology. Specktron has championed the use of Interactive Touch Technology for the education, corporate, government, and hospitality sectors. Mr. Simento has been a partner with Mr. Rego in a Bricks 4 Kidz franchise in the United Arab Emirates since May 2015.
R. Gary Zell, II has served as a director of the Company since May 19, 2020. Mr. Zell has been a Multiple Line General Agent with American National Insurance Company since 1994, responsible for sales, profitability, and recruiting of a $62 million+ insurance agency with over 70 agents and subproducers. From 2016 to the present, Mr. Zell has been president of ThirdPatent Holdings and ThirdPro HMM, which provide social media audits for parents, colleges, universities, human resources professionals, and professional sports. Mr. Zell earned a Bachelors Degree in Economics from Sewanee: The University of the South in Sewanee, Tennessee.
Mike Elkin became the Company’s Chief Financial Officer on October 1, 2020. Mr. Elkin has over 20 years of experience as a controller and financial manager. His experience includes providing financial and accounting advice to REIT’s, non-profits and turnaround situations in the manufacturing, distribution and service company sectors. Since 2017, Mr. Elkin has served as the controller for a private Real Estate Investment Trust (“REIT”). From 2005 to 2006, Mr. Elkin operated a consulting business in which he served as part-time controller or chief financial officer for various private businesses. Mr. Elkin has a B.S. Degree in Accounting from the University of Florida, a Masters Degree in Accounting from Nova Southeastern University, and a Masters Degree in Finance from Florida International University. Mr. Elkin has been recognized by the Jacksonville Business Journal as CFO of the year. He was also honored by the Jacksonville Jewish Journal for Social Action Work in the community.
29
None of the directors and executive officers share any familial relationship with any other executive officers or key employees.
None of the directors and executive officers has been involved in any legal proceedings as listed in Regulation S-K, Item 401(f).
Director Nomination Process
Our Board is responsible for overseeing the selection of persons to be nominated to serve on our Board, and has not formed separate nominating committee. The Board believes that nominating decisions are best determined by the entire board in light of a recent proxy solicitation effort by certain shareholders to make changes to the board’s composition. The Board does not have a formal policy on Board candidate qualifications. The Board may consider those factors it deems appropriate in evaluating director nominees made either by the Board or stockholders, including judgment, skill, strength of character, experience with businesses and organizations comparable in size or scope to the Company, experience and skill relative to other Board members, and specialized knowledge or experience. Depending upon the current needs of the Board, certain factors may be weighed more or less heavily. In considering candidates for the Board, the directors evaluate the entirety of each candidate’s credentials and do not have any specific minimum qualifications that must be met. “Diversity,” as such, is not a criterion that the Board considers. The directors will consider candidates from any reasonable source, including current Board members, stockholders, professional search firms or other persons. The directors will not evaluate candidates differently based on who has made the recommendation.
The Board nomination process is designed to ensure that the Board fulfills its responsibility to recommend candidates who are properly qualified to serve the Company for the benefit of all of its stockholders, consistent with the standards established by the Board under our corporate governance principles. There have been no material changes to the procedures by which shareholders may recommend nominees to our board of directors.
Audit Committee Functions
Since May 2020, we have not had a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(a) of the Exchange Act. Prior to May 2020, we had an Audit Committee, the only member of which was Gary Herman. When constituted, the Audit Committee is responsible for oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company. More specifically, it assists the Board of Directors in fulfilling its oversight responsibilities relating to (i) the quality and integrity of our financial statements, reports and related information provided to stockholders, regulators and others, (ii) our compliance with legal and regulatory requirements, (iii) the qualifications, independence and performance of our independent registered public accounting firm, (iv) the internal control over financial reporting that management and the Board have established, and (v) the audit, accounting and financial reporting processes generally. The Committee is also responsible for review and approval of related-party transactions. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate funding from the Company for, outside legal, accounting or other advisors as it deems necessary to carry out its duties. During periods in which the Company does not have an active Audit Committee, the entire board performs the functions of the Audit Committee.
Audit Committee Financial Expert
The Board has determined that it does not have an “audit committee financial expert” within the meaning of SEC rules.
Code of Ethics
The Company has adopted a Code of Ethics applicable to its principal executive, financial and accounting officers and persons performing similar functions, as well as all directors and employees of the Company. A copy of the Code of Ethics is filed as an exhibit to this report, and posted on the Company’s website, www.creativelearningcorp.com. In addition, the Company will provide a copy of the Code of Ethics to any shareholder who submits a written request in writing to our chief executive officer at Creative Learning Corp., 475 W Townplace, Suite, A, St. Augustine, FL 32092; e-mail: rwhiton@creativelearningcorp.com
30
Communication with the Board of Directors
Our stockholders and other interested parties may send written communications directly to the Board or to specified individual directors, including the Chairman or any other non-management directors, by sending such communications to our corporate headquarters. Such communications will be reviewed by our outside legal counsel and, depending on the content, will be:
| ● | forwarded to the addressees or distributed at the next scheduled board meeting; |
| ● | if they relate to financial or accounting matters, forwarded to the audit committee or distributed at the next scheduled audit committee meeting; |
| ● | if they relate to executive officer compensation matters, forwarded to the compensation committee or discussed at the next scheduled compensation committee meeting; |
| ● | if they relate to the recommendation of the nomination of an individual, forwarded to the full Board or discussed at the next scheduled Board meeting; or |
| ● | if they relate to our operations, forwarded to the appropriate officers of our company, and the response or other handling of such communications reported to the Board at the next scheduled board meeting. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors, executive officer and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports or changes in ownership of such equity securities. Such persons are also required to furnish us with copies of all Section 16(a) forms that they file. Based upon a review of the copies of the forms furnished to us and written representations from certain reporting persons, we believe that, during the year ended September 30, 2019, none of our executive officers, directors or beneficial owners of more than 10% of any class of registered equity security failed to file on a timely basis any such report, except as follows:
| ● | John Simento, a director, failed to file a Form 3 after he was elected to the board of directors on May 19, 2020; |
| ● | R. Gary Zell, II, a director, failed to file a Form 3 after he was elected to the board of directors on May 19, 2020; |
| ● | Rod K. Whiton, an officer and director, filed a late Form 4 on May 27, 2020 reporting the purchase of 800,000 shares of common stock on May 7, 2020; | |
| ● | Blake Furlow, a 10% shareholder, filed a late Form 4 on May 26, 2020 reporting various transactions between January 16, 2020 and May 8, 2020, including the sale of 800,000 shares to Mr. Whiton. |
Item 11. Executive Compensation
The following identifies the elements of compensation for fiscal years 2020 and 2019 with respect to our “named executive officers,” which term is defined by Item 402 of the SEC’s Regulation S-K to include (i) all individuals serving as our principal executive officer at any time during fiscal year 2020, (ii) our two most highly compensated executive officers other than the principal executive officer who were serving as executive officers at September 30, 2020 and whose total compensation (excluding nonqualified deferred compensation earnings) exceeded $100,000, and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to the foregoing item (ii) but for the fact that the individual was not serving as an executive officer of the Company at September 30, 2020.
Based on our compensation for the fiscal year ended September 30, 2020, Bart Mitchell, Rod Whiton and Christopher Rego constitute our only “named executive officers” pursuant to Item 402 of Regulation S-K.
Summary Compensation Table
| Stock | All Other | |||||||||||||||||
| Fiscal | Compensation | Compensation | ||||||||||||||||
| Name and Principal Position | Year | Salary | (4) | (5) | Total | |||||||||||||
| Rod K. Whiton (1) | 2020 | $ | 33,333 | $ | -- | $ | -- | $ | 33,333 | |||||||||
| President | 2019 | $ | -- | $ | -- | $ | -- | $ | -- | |||||||||
| Christopher Rego (2) | 2020 | $ | 40,000 | $ | -- | $ | -- | $ | 40,000 | |||||||||
| CEO | 2019 | $ | -- | $ | -- | $ | -- | $ | -- | |||||||||
| Bart Mitchell (3) | 2020 | $ | 118,000 | $ | -- | $ | 50,000 | $ | 168,000 | |||||||||
| CEO, CFO and COO | 2019 | $ | 125,000 | $ | 16,764 | $ | 10,416 | $ | 152,180 | |||||||||
| 1) | Rod K. Whiton acted as our president from June 2, 2020 to September 30, 2020, and our Principal Executive Officer from August 4, 2020 to September 30, 2020. |
| 2) | Christopher Rego acted as our president of one of our operating subsidiaries from February 5, 2020 to April 30, 2020, and CEO from May 1,, 2020 to September 30, 2020. Mr. Rego was our Principal Executive Officer from May 1, 2020 to August 4, 2020. |
| 3) | Bart Mitchell acted as our CEO from October 1, 2019 to April 29, 2020, when he was replaced by Mr. Rego, and as our president from May 2020 to June 2, 2020, when he resigned. Mr. Mitchell acted as our CFO and COO from October 15, 2018 to September 30, 2019. Mr. Mitchell was our Principal Executive Officer from October 1, 2019 to April 30, 2020. |
| 4) | Consists of 166,667 shares issued to Mr. Mitchell in 2019 as a bonus under his employment agreement valued at $10,000, and 112,739 shares issued to Mr. Mitchell in 2019 for board compensation valued at $6,764. |
| 5) | Consists of $50,000 of severance paid to Mr. Mitchell in 2020 upon his resignation, and a cash amounts paid to Mr. Mitchell of $10,416 in 2019 for board compensation. |
The Company does not provide its officers or employees with pension, stock appreciation rights, long-term incentive or other plans. The Company does not have a defined benefit, pension, profit sharing plan but does offer a 401(k) plan. We did not grant any stock options or stock appreciation rights to our named executive officers in the last fiscal year. We did not reprice any options or stock appreciation rights during the last fiscal year. We did not waive or modify any specified performance target, goal or condition to payout with respect to any amount included in any incentive plan compensation included in the summary compensation table.
31
Compensation Philosophy
The Board is responsible for creating and reviewing the compensation of our executive officers, as well as overseeing our compensation and benefit plans and policies and administering our equity incentive plans. We believe in providing a competitive total compensation package to its executives through a combination of base salary, annual performance bonuses, and long-term equity awards. The executive compensation program is designed to achieve the following objectives:
| ● | provide competitive compensation that will help attract, retain and reward qualified executives; |
| ● | align executives’ interests with our success by making a portion of the executive’s compensation dependent upon corporate performance; and |
| ● | align executives’ interests with the interests of stockholders by including long-term equity incentives. |
The Board believes that our executive compensation program should include annual and long-term components, including cash and equity-based compensation, and should reward consistent performance that meets or exceeds expectations. The Board evaluates both performance and compensation to make sure that the compensation provided to executives remains competitive relative to compensation paid by companies of similar size and stage of development operating in the payment processing industry and taking into account our relative performance and its own strategic objectives.
Outstanding Equity Awards At Fiscal Year-End
None of the named executive officers have any unvested equity awards or unexercised options in the Company as of September 30, 2020.
Employment Agreements
We were party to an employment agreement with Bart Mitchell, our current chief executive officer, dated October 16, 2018. Under the employment agreement, Mr. Mitchell was employed as our chief financial officer and chief operating officer, was entitled to cash compensation of $125,000 per year, and was entitled to a grant of restricted stock with a value of $10,000 on the last day of each completed year of employment. Mr. Mitchell is also entitled to discretionary bonuses on an annual basis, and the right to participate in medical and dental coverage, a 401K plan and any other benefits offered to employees of the Company.
On October 1, 2019, Mr. Mitchell was appointed our chief executive officer, and no longer served as our chief financial officer or chief operating officer. At the same time, the Company entered into an employment agreement with Mr. Mitchell dated October 1, 2019, which had a term of one year. Under the employment agreement, Mr. Mitchell was entitled to a base salary of $150,000 per year. In addition, Mr. Mitchell was entitled to a stock grant on the last day of the term of his employment equal to the lesser of the shares of common stock with a value of $15,000 or 200,000 shares. In the event Mr. Mitchell was terminated prior to the end of the term of the agreement, the number of shares would be prorated based on the actual number of days he worked for the Company.
On April 30, 2020, Christopher Rego was appointed chief executive officer of the Company, and Bart Mitchell was appointed president of the Company. On June 2, 2020 Bart Mitchell tendered his resignation to the Company as president, effective as of the close of business on June 8, 2020. At such time he received a severance package of $50,000.
On June 8, 2020, the Company’s board approved a salary of $120,000 per year for Mr. Rego, the Company’s chief executive officer. The Company does not have an employment agreement with Mr. Rego.
On June 2, 2020, the Company’s board approved a salary of $100,000 per year for Mr. Whiton, the Company’s president. The Company does not have an employment agreement with Mr. Whiton.
Severance and Change of Control Benefits
The Company does not currently have any agreements with its named executive officers or directors which provide for severance or change of control benefits.
Employee Benefit Plans and Pension Benefits
The Company does not provide its officers or employees with pension, stock appreciation rights, long-term incentive or other plans. The Company does not have a defined benefit, pension or profit-sharing plan.
The Company sponsors a 401(k) plan, in which our named executive officer’s are allowed to participate on the same basis as our other employees. Effective May 1, 2015, our Board approved a matching contribution of 100% on the first 4% of an employee’s compensation which is treated as an elective deferral. During the years ended September 30, 2020 and 2019, the Company made contributions to this plan of approximately $10,775 and $5,633, respectively.
Nonqualified Deferred Compensation
None of our NEOs are covered by a deferred contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
32
Director Compensation
The following table details the total compensation earned by our non-employee directors during the year ended September 30, 2020.
| Name | Fee Earned or Paid in Cash ($) (2) | Restricted Stock Awards ($)(1) | All Other Compensation ($) | Total $ | ||||||||||||
| Gary Herman | $ | 7,500 | $ | 2,500 | -- | $ | 10,000 | |||||||||
| JoyAnn Kenny-Charlton | $ | -- | $ | -- | -- | -- | ||||||||||
| John Simento | $ | -- | $ | -- | -- | -- | ||||||||||
| R. Gary Zell, II | $ | -- | $ | -- | -- | -- | ||||||||||
| (1) | Includes 35,714 shares issued to Mr. Herman for director compensation valued at $2,500. |
| (2) | Excludes travel expense reimbursements. |
| Name | Number of Shares Subject to Option Awards Held as of September 30, 2020 | |||
| JoyAnn Kenny-Charlton | 216,000 | |||
For a more detailed description of the assumptions used for purposes of determining grant date fair value, see Note (1) to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Share-Based Compensation” included in the Form 10-K for the 2020 fiscal year.
Our Board does not have a current compensation policy for its directors. However, we reimburse our directors for reasonable travel and other related expenses.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of December 21, 2020, certain information concerning the beneficial ownership of our common stock by (i) each person known by us to own beneficially five percent (5%) or more of the outstanding shares of each class, (ii) each of our directors and named executive officers, and (iii) all of our executive officers and directors as a group.
33
The number of shares beneficially owned by each 5% stockholder, director or executive officer is determined under the rules of the Securities & Exchange Commission, or SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and also any shares that the individual or entity has the right to acquire within 60 days after March 25, 2020 through the exercise of any stock option, warrant or other right, or the conversion of any security. Unless otherwise indicated, each person or entity has sole voting and investment power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. The inclusion in the table below of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (1) | ||||||
| 5% Beneficial Owners: | ||||||||
| Blake Furlow (2) 2110 N. Westgate Drive Boise, ID 83704 | 2,301,239 | 17.3 | % | |||||
| Michelle Cote (3) 1600 San Carlos St. St. Augustine, FL 32080 | 1,420,000 | 10.7 | % | |||||
| Named Executive Officers and Directors: | ||||||||
| Rod Whiton (4) (7) | 1,299,035 | 9.8 | % | |||||
| JoyAnn Kenny-Charlton (5) (7) | 488,472 | 3.6 | % | |||||
| Christopher Rego (6) (7) | 666,250 | 5.0 | % | |||||
| John Simento (7) | -- | -- | % | |||||
| R. Gary Zell, II (7) | -- | -- | % | |||||
| All Officers and Directors as a Group | 2,150,257 | 14.5 | % | |||||
| (1) | Based upon 13,298,310 shares of Common Stock issued and outstanding as of December 21, 2020. |
| (2) | Includes 51,029 shares owned by Mr. Furlow's spouse. |
| (3) | All shares held by Cote Trading, LLC, an entity controlled by Ms. Cote. |
| (4) | Includes 6,067 shares held in UTMA accounts for Mr. Whiton's children, over which Mr. Whiton has voting and dispositive power. |
| (5) | Includes 216,000 shares issuable pursuant to warrants held by Ms. Kenny-Charlton which are immediately exercisable. |
| (6) | All shares are owned in joint tenancy with the spouse. |
| (7) | The address for the shareholder is c/o Creative Learning Corp., 475 W Townplace, Suite, A, St. Augustine, FL 32092. |
34
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of September 30, 2020 about the securities issued, or authorized for future issuance, under our equity compensation plans.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants | Weighted- average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance (c) | |||||||||
| Equity compensation plans approved by security holders | – | – | – | |||||||||
| Equity compensation plans not approved by security holders | ||||||||||||
| May 2017 Options Grants | 1,764,000 | 0.30 | — | |||||||||
| September 2017 Options Grants | 118,793 | 0.18 | — | |||||||||
| March 2019 Options Grants | 294,778 | 0.17 | — | |||||||||
| Total | 2,177,571 | 0.23 | — | |||||||||
35
Item 13. Certain Relationships and Related Transactions, and Director Independence
Effective September 30, 2019, Blake Furlow resigned as Chief Executive Officer of the Company. Mr. Furlow received a severance payment of $30,000 pursuant to the terms of a Severance Agreement. Pursuant to his employment agreement, the Company also issued an aggregate of 566,176 shares of Common Stock to Mr. Furlow.
On September 27, 2019, in connection with their service on the Board of Directors for fiscal years 2017, 2018 and 2019, the Company approved the issuance of (i) 99,362, (ii) 272,472, (iii) 112,739 and (iv) 272,472 shares of Common Stock to Blake Furlow, Gary Herman, Bart Mitchell and JoyAnn Kenny-Charlton, respectively as well as a total of cash payments of $85,041.
Christopher Rego has been a director since February 5, 2020, and our Chief Executive Officer since May 1, 2020. Prior to his appointment, Mr. Rego purchased an active franchise in California. During the year ended September 30, 2020 the Company recognized royalty revenue from the franchise of $16,650 and recognized marketing fee revenue from the franchise of $829. Total payments made by the franchisee were $7,681. As of September 30, 2020 and 2019 the accounts receivable balance with the franchise was $11,894 and $21,536, respectively and the franchises had deferred revenue balances of $0.
John Simento has been a director of the Company since May 19, 2020. Prior to Mr. Rego’s and Mr. Simento’s appointments with the Company, they purchased a Company franchise in the United Arab Emirates (the “UAE”). The Company filed an arbitration complaint against them in December 2019 regarding issues related to opening the franchise. The complaint was resolved by a Settlement Agreement dated February 5, 2020. Under the Settlement Agreement, the Company forgave all back royalty fees through July 2019, equally $18,825, and agreed to defer all other fees until the franchise was able to obtain a business license to operate in the U.A.E., which is currently delayed due to the Coronavirus pandemic. The franchise is currently non-operational as a result of an inability to obtain the issuance of a business license form the UAE due to the Coronavirus pandemic. If the franchise is not able to procure the necessary authorizations to operate, the franchisees would not owe any franchise fees. As a consequence, we have not realized any revenue from the franchise.
Mr. Rego is also the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10, 2020. The term of the agreement is nine months and calls for a development fee of $12,900 per month. During the year ended September 30, 2020 the Company paid seven months payments of $12,900 in accordance with the terms of the agreement and paid an additional $15,700 for additional services, for a total of $106,000.
On or about December 6, 2019, Christopher Rego and Rod Whiton (the “Solicitors”), prior to their appointments as officers or directors of the Company, commenced a consent solicitation to the shareholders of the Company and on February 5, 2020, the Company and the Solicitors entered into an agreement to settle their dispute over the consent solicitation. The settlement resulted in the Company paying $10,000 as reimbursement for certain costs that they incurred related to the consent solicitation, the Company agreeing to appoint Mr. Rego and Mr. Whiton to the board, and the Company’s agreeing to appoint Mr. Rego as chief executive officer, among other provisions. The Company ultimately paid a total of $20,000 in costs incurred by Messrs. Rego and Whiton in relation to the consent solicitation.
Director Independence
Our current Board consists of JoyAnn Kenny-Charlton, Christopher Rego, Rod Whiton, John Simento and R. Gary Zell. Our common stock is currently quoted on the over the counter market. Since the over the counter market does not have its own rules for director independence, we use the definition of independence established by the NASDAQ Stock Market. Under applicable NASDAQ Stock Market rules, a director will only qualify as an “independent director” if the director at any time in the past three years (a) was employed by us, (b) received more than $120,000 in compensation from us, other than for board services, (c) had a family member who was employed as an executive officer of us, (d) was, or had a family member that was, a partner, controlling shareholder or executive officer of any organization that received payments for property or services that exceeded the greater of 5% of the recipient’s gross revenues or $200,000, (e) was, or had a family member that was, employed as an executive officer of another entity during the past three years where any of the executive officers of us serve on the compensation committee, or (f) was, or had a family member that was, a partner in our auditor at any time in the past three years. At this time, we have determined that we have three independent directors: JoyAnn Kenny-Charlton, John Simento and R. Gary Zell, II.
The Board does not currently have any committees. The Board has approved the formation of an Audit Committee, and an Audit Committee charter, but no members currently serve on the Audit Committee. The independent directors perform the functions of the Audit Committee.
36
Policies with Respect to Transactions with Related Persons
The Board has adopted a Code of Ethics, which is available at www.creativelearningcorp.com, that sets forth various policies and procedures intended to promote the ethical behavior of the Company’s employees, officers and directors. The Code of Ethics describes our policy on conflicts of interest.
The executive officers and the Board are also required to complete a questionnaire on an annual basis which requires them to disclose any related person transactions and potential conflicts of interest. The responses to these questionnaires are reviewed by outside corporate counsel, and, if a transaction is reported by an independent director or executive officer, the questionnaire is submitted to the Audit Committee, or the independent directors if there is no Audit Committee. If necessary, the Audit Committee or the independent directors, as applicable, will determine whether the relationship is material and will have any effect on the director’s independence. After making such determination, the Audit Committee or independent directors, as applicable, will report its recommendation on whether the transaction should be approved or ratified by the entire Board.
Item 14. Principal Accountant Fees and Services.
The following table presents fees for professional services provided by MAC Accounting Group LLP for the years September 30, 2020 and 2019, respectively:
The following table shows the fees billed aggregate to the Company for the periods shown:
| Fiscal Year 2020 | Fiscal Year 2019 | |||||||
| Audit Fees (1) | $ | 60,000 | $ | 60,000 | ||||
| Audit-Related Fees (2) | $ | -- | $ | -- | ||||
| Tax Fees (3) | $ | -- | $ | -- | ||||
| All Other Fees (4) | $ | -- | $ | -- | ||||
| Total Fees | $ | 60,000 | $ | 60,000 | ||||
| (1) | Audit Fees. Audit services include work performed for the audit of our financial statements and the review of financial statements included in our quarterly reports, as well as work that is normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings. |
| (2) | Audit-related services. Audit-related services are for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not covered above under “audit services.” |
| (3) | Tax services. Tax services include all services performed by the independent registered public accounting firm’s tax personnel for tax compliance, tax advice and tax planning. |
| (4) | All other Fees. All other fees are those services and/or travel expenses not described in the other categories. |
Audit fees represent amounts invoiced for professional services rendered for the audit of the Company’s annual financial statements, including the Form 10-K report, and the reviews of the quarter ending financial statements included in the Company’s Form 10-Q reports.
Pre-Approval Policy and Procedures
We have adopted an Audit Committee charter, which contains policies and procedures which set forth the manner in which the Audit Committee will review and approve all services to be provided by the independent auditor before the auditor is retained to provide such services. The policy requires Audit Committee pre-approval of the terms and fees of the annual audit services engagement, as well as any changes in terms and fees resulting from changes in audit scope or other items. The Audit Committee also pre-approves, on an annual basis, other audit services, and audit-related and tax services set forth in the policy, subject to estimated fee levels, on a project basis and aggregate annual basis, which have been pre-approved by the Audit Committee.
All other services performed by the auditor that are not prohibited non-audit services under SEC or other regulatory authority rules must be separately pre-approved by the Audit Committee. Amounts in excess of pre-approved limits for audit services, audit-related services and tax services require separate pre-approval of the Audit Committee.
All of the services reflected in the above table were approved by the Audit Committee. We have not engaged our auditor to perform any services other than audit services.
Since May 2020, we have not had a separately constituted Audit Committee, and our independent board members have performed the duties of the Audit Committee as described in the Audit Committee charter.
37
Item 15. Exhibits, Financial Statement Schedules.
The following documents are filed as part of this report:
| (1) | Financial Statements |
Consolidated Financial Statements:
| ● | Reports of Independent Registered Public Accounting Firms; |
| ● | Consolidated Balance Sheets as of September 30, 2020 and September 30, 2019; |
| ● | Consolidated Statements of Operations for the years ended September 30, 2020 and September 30, 2019; |
| ● | Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2020 and September 30, 2019. |
| ● | Consolidated Statements of Cash Flows for the years ended September 30, 2020 and September 30, 2019; |
| (3) | Exhibits |
The accompanying Index to Exhibits is incorporated herein by reference.
None.
INDEX TO EXHIBITS
| * | Filed herewith. |
| ** | Furnished herewith. |
38
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Creative Learning Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Creative Learning Corporation and its subsidiaries (the Company) as of September 30, 2020 and 2019, the related consolidated statement of operations, stockholders' equity (deficit) and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mac Accounting Group, LLP
We have served as the Company's auditor since 2019.
Midvale, Utah
December 30, 2020
F-1
| CREATIVE LEARNING CORPORATION |
| Consolidated Balance Sheets |
| September 30, | September 30, | |||||||
| 2020 | 2019 | |||||||
| Current Assets: | ||||||||
| Cash | $ | 427,659 | $ | 522,071 | ||||
| Restricted Cash (marketing fund) | 20,194 | 17,950 | ||||||
| Accounts receivable, less allowance for doubtful accounts of approximately $942,000 and $663,000, respectively | 269,211 | 279,109 | ||||||
| Prepaid commission expense | 212,122 | 235,129 | ||||||
| Prepaid expense | 10,452 | 7,867 | ||||||
| Marketing Fund | — | — | ||||||
| Notes receivables - current portion, less allowance for doubtful accounts of approximately $91,000 and $91,000, respectively | 9,159 | 3,000 | ||||||
| Total Current Assets | 948,797 | 1,065,126 | ||||||
| Prepaid commission expense- net of current portion | 512,756 | 773,062 | ||||||
| Notes receivables - net of current portion | — | — | ||||||
| Property and equipment, net of accumulated depreciation of approximately $416,000 and $383,000, respectively | 131,618 | 323,789 | ||||||
| Deposits | 833 | — | ||||||
| Total Assets | $ | 1,594,004 | $ | 2,161,977 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 69,527 | $ | 107,697 | ||||
| Notes payable | 119,980 | — | ||||||
| Deferred revenue | 915,103 | 986,039 | ||||||
| Accrued liabilities | 8,743 | 125,720 | ||||||
| Accrued marketing fund | — | — | ||||||
| Total Current Liabilities | 1,113,353 | 1,219,456 | ||||||
| Deferred revenue - net of current portion | 2,297,576 | 3,382,107 | ||||||
| Total Liabilities | 3,410,929 | 4,601,563 | ||||||
| Commitments and Contingencies (Note 10) | — | — | ||||||
| Stockholders' Equity (Deficit) | ||||||||
| Preferred stock, $.0001 par value; 10,000,000 shares authorized; -0- shares issued and outstanding | — | — | ||||||
| Common stock, $.0001 par value; 50,000,000 shares authorized 13,363,410 shares issued and 13,298,310 shares outstanding as of September 30, 2020; 13,607,102 shares issued and 13,542,002 shares outstanding as of September 30, 2019 | 1,334 | 1,360 | ||||||
| Additional paid in capital | 2,990,080 | 2,987,554 | ||||||
| Treasury Stock 65,100 shares, at cost | (34,626 | ) | (34,626 | |||||
| Accumulated Deficit | (4,773,713 | ) | (5,393,874 | ) | ||||
| Total Stockholders' Equity (Deficit) | (1,816,925 | ) | (2,439,586 | ) | ||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 1,594,004 | $ | 2,161,977 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-2
CREATIVE LEARNING CORPORATION
Consolidated Statements of Operations
| September 30, | September 30, | |||||||
| 2020 | 2019 | |||||||
| REVENUES | ||||||||
| Royalties fees | $ | 1,448,228 | $ | 1,695,788 | ||||
| Initial franchise fees | 1,237,994 | 2,479,921 | ||||||
| Marketing fund revenue | 130,496 | 222,653 | ||||||
| Technology fees | 221,722 | 118,504 | ||||||
| Merchandise sales | — | 1,098 | ||||||
| TOTAL REVENUES | 3,038,440 | 4,517,964 | ||||||
| COST OF GOODS SOLD | — | 272 | ||||||
| GROSS PROFIT | 3,038,440 | 4,517,692 | ||||||
| OPERATING EXPENSES | ||||||||
| Salaries, payroll taxes and stock-based compensation | 613,683 | 884,715 | ||||||
| Professional, legal and consulting fees | 565,996 | 540,196 | ||||||
| Bad debt expense | 349,794 | (67,018 | ) | |||||
| Other general and administrative expenses | 279,775 | 206,628 | ||||||
| Franchise commissions | 288,734 | 605,620 | ||||||
| Franchise training and expenses | 3,381 | 14,880 | ||||||
| Depreciation | 112,543 | 115,627 | ||||||
| General Advertising | 81,413 | 21,013 | ||||||
| Franchisee marketing fund expense | 130,496 | 222,653 | ||||||
| Office expense | 27,170 | 19,535 | ||||||
| TOTAL OPERATING EXPENSES | 2,452,985 | 2,563,849 | ||||||
| OPERATING INCOME (LOSS) | 585,455 | 1,953,843 | ||||||
| OTHER INCOME (EXPENSE) | 34,706 | 63,497 | ||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 620,161 | 2,017,340 | ||||||
| PROVISION FOR INCOME TAXES | — | — | ||||||
| NET INCOME (LOSS) | $ | 620,161 | $ | 2,017,340 | ||||
| NET INCOME (LOSS) PER SHARE | ||||||||
| Basic | $ | 0.05 | $ | 0.17 | ||||
| Diluted | $ | 0.04 | $ | 0.17 | ||||
| Basic weighted average number of common shares outstanding | 13,402,981 | 12,043,558 | ||||||
| Diluted weighted average number of common shares outstanding | 13,784,990 | 12,043,558 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Creative Learning Corporation
Consolidated Statement of Changes in Stockholders' Equity/(Deficit)
| Additional | Total Stockholder's | |||||||||||||||||||||||||||
| Treasury Stock | Common stock | Paid-in | Accumulated | Equity/ | ||||||||||||||||||||||||
| Shares | Value | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance October 1, 2018 | (65,100 | ) | $ | (34,626 | ) | 12,075,875 | $ | 1,207 | $ | 2,897,285 | $ | (2,391,525 | ) | $ | 472,341 | |||||||||||||
| Stock-based compensation | 1,531,227 | 153 | 90,269 | — | 90,422 | |||||||||||||||||||||||
| Adoption of ASC 606 | — | — | — | — | — | (5,019,689 | ) | (5,019,689 | ) | |||||||||||||||||||
| Net loss | — | — | — | — | — | 2,017,340 | 2,017,340 | |||||||||||||||||||||
| Balance September 30, 2019 | (65,100 | ) | (34,626 | ) | 13,607,102 | 1,360 | 2,987,554 | (5,393,874 | ) | (2,439,586 | ) | |||||||||||||||||
| Stock based compensation | — | — | 35,714 | 2 | 2,498 | — | 2,500 | |||||||||||||||||||||
| Shares cancelled | — | — | (279,406 | ) | (28 | ) | 28 | — | — | |||||||||||||||||||
| Net Income | — | — | — | — | — | 620,161 | 620,161 | |||||||||||||||||||||
| Balance, September 30, 2020 | (65,100 | ) | $ | (34,626 | ) | 13,363,410 | $ | 1,334 | $ | 2,990,080 | $ | (4,773,713 | ) | $ | (1,816,925 | ) | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CREATIVE LEARNING CORPORATION
Consolidated Statements of Cash Flows
| For the Fiscal Years ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income/(Loss) | $ | 620,161 | $ | 2,017,340 | ||||
| Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: | ||||||||
| Depreciation | 112,543 | 115,627 | ||||||
| Gain on sale of assets held for sale | (20,603 | ) | (65,257 | ) | ||||
| Bad debt expense | 349,794 | (67,018 | ) | |||||
| Stock based compensation | 2,500 | 90,422 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (339,896 | ) | (17,256 | ) | ||||
| Prepaid expenses | (2,585 | ) | 21,858 | |||||
| Prepaid commission expense | 283,313 | 599,992 | ||||||
| Deposits | (833 | ) | 1,425 | |||||
| Accounts payable | (38,170 | ) | (53,314 | ) | ||||
| Accrued liabilities | (116,977 | ) | 111,115 | |||||
| Deferred revenue | (1,155,467 | ) | (2,259,726 | ) | ||||
| Accrued marketing fund | - | (97,334 | ) | |||||
| Net cash provided by (used in) operating activities | (306,220 | ) | 397,874 | |||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | - | (118,838 | ) | |||||
| Proceeds from the sale of assets | 100,231 | 145,787 | ||||||
| (Issuance)/Collection of Notes receivable | (6,159 | ) | 12,000 | |||||
| Net cash provided by investing activities | 94,072 | 38,949 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from notes payable | 119,980 | - | ||||||
| Net cash provided by financing activities | 119,980 | - | ||||||
| Net change in cash, cash equivalents and restricted cash | (92,168 | ) | 436,823 | |||||
| Cash, cash equivalents and restricted cash at beginning of period | 540,021 | 103,198 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 447,853 | $ | 540,021 | ||||
| Noncash financing activity: | ||||||||
| Shares cancelled | $ | 28 | $ | - | ||||
| Noncash activity related to FASB ASC 606: | $ | - | $ | 5,019,689 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CREATIVE LEARNING CORPORATION
Notes to Consolidated Financial Statements
September 30, 2020 and 2019
(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 (“BFK”) was formed in the State of Nevada on May 19, 2009. Effective July 2, 2010, CLC was acquired by BFK in a transaction classified as a reverse acquisition. CLC concurrently changed its name from B2 Health, Inc. to Creative Learning Corporation. During fiscal year 2020, BFK eLearning LLC was formed in the State of Delaware.
In addition to the accounts of CLC and BFK, the accompanying consolidated financial statements include the accounts of CLC’s subsidiaries, BFK Development Company LLC (“BFKD”), BFK eLearning LLC (“B4KEL”) and SF LLC (“Sew Fun Studios”). In 2020, the Company decided to put on hold the Sew Fun Studios business.
The organizational documents for BFK Development Company LLC, B4KEL and SF LLC do not specify a termination date. Each of the above listed LLC’s has a single member, controlled 100% by CLC.
The Company also owns a 49% non-controlling interest in Bricks4Schoolz, LLC, which is accounted for under the cost method (subject to the Company’s rescission of its interest).
CLC operates wholly-owned subsidiaries BFK and SF under the trade names Bricks 4 Kidz® and Sew Fun Studios™ respectively, that offer children's enrichment and education franchises.
CLC and its wholly owned subsidiaries BFK, BFKD, B4KEL, and SF LLC are hereinafter referred to collectively as the "Company".
Basis of Presentation
The Company financial statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
International franchise fees vary and are set relative to the potential of the franchised territories. In addition, the Company awards master agreements outside of the United States and Canada. The royalty structure is the same for both our US and International franchisees. Contracts are structured such that the Company collects revenue from foreign franchises in US dollars. We do not have international subsidiaries.
The Company has multiple franchise concepts, but all concepts are managed centrally as one segment and are reviewed by the Company in total. Accordingly, decision-making regarding the Company's overall operating performance and allocation of Company resources are assessed on a consolidated basis. As such, the Company operates as one reporting segment.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CLC and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying financial statements do not include the accounts of Bricks4Schoolz, LLC, a 49% owned entity which is accounted for under the cost method (subject to the Company’s rescission of its interest).
Fiscal year
The Company operates on a September 30 fiscal year-end.
F-6
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates and assumptions made by management include allowance for doubtful accounts, allowance for deferred tax assets, depreciation of property and equipment, recoverability of long lived assets and fair value of equity instruments. Actual results could differ from those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Cash, Restricted 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. The Company records restricted cash for marketing funds collected from the franchisees in excess of amounts spent for marketing. Per the franchise agreements, a marketing fund of 2% of franchisees’ gross cash receipts is collected by the Company and held to be spent on the promotion of the brand (see Note 8).
Amounts recorded as cash, cash equivalents, and restricted cash in the statement of cash flows is as follows:
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash | $ | 427,659 | $ | 522,071 | ||||
| Cash Equivalents | — | — | ||||||
| Restricted Cash | 20,194 | 17,950 | ||||||
| Total | $ | 447,853 | $ | 540,021 | ||||
The Company maintains cash balances which at times exceed the federally insured limit of $250,000. The Company believes there is no significant risk with respect to these deposits. The Company had approximately $-0- cash in excess of the federally insured limit at September 30, 2020 as compared to $241,000 at September 30, 2019.
Accounts Receivable
The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and considers the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Accounts and receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowances for doubtful accounts at September 30, 2020 and 2019 are adequate, but actual write-offs could exceed the recorded allowance. During the years ended September 30, 2020 and 2019 the balance in the allowance for doubtful accounts was approximately $942,000 and $663,000, respectively.
Notes Receivable
Accounting Standards Codification (“ASC”) 310, Receivables, provides guidance for receivables and notes that arise from credit sales, loans or other transactions. Financing receivable includes loans and notes receivable. Originated loans we hold for which we have the intent and ability to hold for the foreseeable future or to maturity (or payoff) are classified as held for investment. Financing receivables held for investment are reported in our consolidated balance sheets at the outstanding principal balance adjusted for any write -offs, allowance for loan losses, deferred fees or costs, and any unamortized premiums or discounts. Interest income is accrued on outstanding principal as earned. Unamortized discounts and premiums are amortized using the interest method with the amortization recognized as part of interest income in the consolidated statements of operations. During the years ended September 30, 2020 and 2019 the balance in the allowance for doubtful notes receivable was approximately $91,000 and $91,000, respectively.
Long-Lived Assets
The Company’s long-lived assets currently consist of property and equipment, and prior to the year ended September 30, 2019 included intangible assets. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates of asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
F-7
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. 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.
| Property and Equipment | Useful Life | |
| Equipment | 5 years | |
| Furniture and Fixtures | 5 years | |
| Property Improvements | 15-40 years | |
| Software | 3 years |
Treasury stock
The Company records treasury stock at cost. Treasury stock is comprised of shares of common stock purchased by the Company in the secondary market.
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.
F-8
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.
The Company adopted the new revenue standard (ASC 606) on October 1, 2018 for contracts with remaining performance obligations as of October 1, 2018. The Company elected to apply the new standard retrospectively with an adjustment to the opening balance of retained earnings as of the date of adoption. Under ASC 606, the Company considers initial franchise fees to be a part of the license of symbolic intellectual property (“IP”), therefore the performance obligation related to these fees is satisfied over time as the Company fulfills its promise to grant the customer rights to use, and benefit from, the Company’s IP, as well as support and maintain the IP. The initial franchise fee, then, is recorded as deferred revenue at inception and recognized on a straight-line basis over the contract term.
In accordance with ASC 606-10-55-65, the Company has determined that the royalty fees, marketing fees, and technology fees are subject to a sales and usage-based royalties’ constraint on licenses of IP. Accordingly, these fees are recognized as revenue at the later of when the sales or usage occurs or the related performance obligation is satisfied. Technology fees are recorded net of processing fees. Marketing fees are limited to marketing amounts expensed; therefore, the Company will recognize amounts received in excess of amounts spent on the balance sheet in the accrued marketing fund liability.
The Company collects transfer fees when contracts are transferred between parties and accounts for the transfer as a contract modification under ASC 606. Because the transfer does not increase the scope of the contract or promise any additional goods or services and there are no new distinct services that will be provided after the transfer the Company considers the transfer fee part of the existing contract. Transfer fees, then, are recorded as deferred revenue at inception and recognized on a straight-line basis over the remaining contract term.
When contracts are terminated due to default, or in conjunction with an early termination agreement, the Company accounts for the early termination as a contract modification under ASC 606. Because the termination eliminates any future performance obligations of the Company any deferred revenue associated with the terminated contract is recognized into revenue at the time of termination, along with any early termination fees, in the initial franchise fee line on the Company’s Statement of Operations.
The Company generates revenue from sales of merchandise where the performance obligation is met, and therefore revenue recognized, upon the delivery of merchandise to the customer.
F-9
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 year ended September 30, 2019 and 2020 the activity in the deferred revenue account was as follows:
| Balance, September 30, 2018 | $ | - | ||
| Deferred revenue recognized upon adoption of ASC 606 | 6,627,872 | |||
| Initial franchise fees collected | 220,195 | |||
| Revenue recognized into revenue | (2,479,921 | ) | ||
| Balance, September 30, 2019 | 4,368,146 | |||
| Initial franchise fees collected | 82,527 | |||
| Revenue recognized into revenue | (1,237,994 | ) | ||
| Balance, September 30, 2020 | 3,212,679 | |||
| Current portion | (915,103 | ) | ||
| Deferred revenue, net of current portion | $ | 2,297,576 |
Amounts expected to be recognized into revenue related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2020 were as follows:
| Year ended September 30, 2021 | $ | 915,103 | ||
| Year ended September 30, 2022 | 832,477 | |||
| Year ended September 30, 2023 | 698,778 | |||
| Year ended September 30, 2024 | 409,865 | |||
| Year ended September 30, 2025 and thereafter | 356,456 | |||
| Total | $ | 3,212,679 |
Contract Liability – Accrued Marketing Fund
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 presented 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. During the year ended September 30, 2019 and 2020 the activity in the accrued marketing fund liability account was as follows:
| Balance, September 30, 2018 | $ | 97,334 | ||
| Marketing fund billings | 125,319 | |||
| Commissions recognized into expense | (222,653 | ) | ||
| Balance, September 30, 2019 | - | |||
| Marketing fund billings | 130,496 | |||
| Commissions recognized into expense | (130,496 | ) | ||
| Balance, September 30, 2020 | $ | - |
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, 2019, the date the Company adopted ASC 606, they capitalized the value of sales commissions as a contract asset and is amortizing those costs straight-line over the contract life of the franchise agreement to which they relate. During the year ended September 30, 2019 and 2020 the activity in the contract asset account was as follows:
| Balance, September 30, 2018 | $ | - | ||
| Prepaid commissions recognized upon adoption of ASC 606 | 1,608,185 | |||
| Commissions paid | 5,413 | |||
| Commissions recognized into expense | (605,404 | ) | ||
| Balance, September 30, 2019 | 1,008,191 | |||
| Commissions paid | 5,421 | |||
| Commissions recognized into expense | (288,734 | ) | ||
| Balance, September 30, 2020 | 724,878 | |||
| Current portion | (212,122 | ) | ||
| Prepaid commission expense, net of current portion | $ | 512,756 |
General Marketing Costs
General marketing costs are expensed as incurred. The Company incurred general marketing costs for the years ended September 30, 2020 and 2019 of approximately $81,000 and $21,000, respectively.
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.
F-10
The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows.
The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at September 30, 2020 and 2019, respectively, and has not recognized interest and/or penalties during the years ended September 30, 2020 and 2019, respectively, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within the next twelve months.
The tax years subject to examination by major tax jurisdictions include the years 2017 and forward by the U.S. Internal Revenue Service, and the years 2016 and forward for various states.
Net earnings (loss) per share
Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings 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. FASB ASC 260, Earnings per Share, requires a dual presentation of basic and diluted earnings per share. Any stock options or warrants that would have anti-dilutive effect have been excluded from the computation of earnings per share. The number of such shares excluded from the computations of diluted loss per share totaled 1,795,562 at September 30, 2020 and 2,177,571 at September 30, 2019.
Stock-based compensation
The Company accounts for employee stock awards for services based on the grant date fair value of the instrument issued and those issued to non-employees are recorded based on the grant date fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable. Stock Awards are expensed over the service period. Forfeitures are recognized as they occur.
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
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, are required. The new standard was adopted by the Company in fiscal year 2020 but had no impact on the Company’s financial statements as the Company does not have any leases that meet the criteria under this standard.
All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
(2) Liquidity
During the current year, the Company had net income of approximately $620,000 and has sufficient cash on hand to cover expenses for the next 12 months.
The recent COVID-19 outbreak has been declared a pandemic by the World Health Organization, has spread to the United States and many other parts of the world and has adversely affected our business operations, employee availability, financial condition, liquidity and cash flow and the length of such impacts are uncertain.
The outbreak of COVID-19 continues to grow both in the United States and globally, and related government and private sector responsive actions have and will continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.
The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating in heavily populated areas, such as malls and shopping centers. Among the precautions has been the closure of a substantial portion of the schools in the United States, which has adversely impacted our royalty revenue from franchisees and our ability to sell new franchises. There is significant uncertainty around the breadth and duration of these school closures and other business disruptions related to COVID-19, as well as its impact on the U.S. and global economy. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. We have asked our corporate employees whose jobs allow them to work remotely to do so for the foreseeable future. Such precautionary measures could create operational challenges, as we adjust to a remote workforce, which could adversely impact our bustiness.
F-11
We had cash flows used in operating activities of approximately $306,000 for the year ended September 30, 2020 compared to cash flows provided by operating activities of approximately $398,000 for the year ended September 30, 2019. The decrease in cash flows provided by operating activities for the year ended September 30, 2020 compared to the year ended September 30, 2019 relates primarily to lower franchise and royalty revenues.
We had cash flows provided by investing activities of approximately $94,000 for the year ended September 30, 2020 compared to cash flows provided by investing activities of approximately $39,000 for the year ended September 30, 2019. The increase in cash flows provided investing activities was primarily due to acquiring no property and equipment during the year ended September 30, 2020 compared to acquiring approximately $119,000 during the year ended September 30, 2019.
We had cash flows provided by financing activities of approximately $120,000 for the year ended September 30, 2020, compared to $0 for the year ended September 30, 2019. This was due to the Company receiving proceeds from a loan from the Small Business Administration as further described in Note 10.
The Company is dependent upon both franchise sales and royalty fees to continue current business operations and liquidity.
(3) Related Party Transactions
In December 2017, the Company granted a total of 14,286 warrants to two Directors of the Company. These warrants were granted in conjunction with the issuance of standby letters of credit from the two directors. The warrants had an exercise price of $0.14 per share and expired five years from the date of grant. These warrants were valued using the Black Scholes method. The fair value of the warrants on the date of grant were $2,000, and the warrants vested immediately. The Company expensed $2,000 in connection with the grant during the year ended September 30, 2018. These warrants were exercised in September 2019 for 14,286 shares of common stock. The Company agreed to waive the $2,000 exercise price owed in total from these warrant holders.
Effective September 30, 2019, Blake Furlow resigned as Chief Executive Officer of the Company. Mr. Furlow received a severance payment of $30,000 pursuant to the terms of a Severance Agreement. Pursuant to his employment agreement, the Company also issued an aggregate of 566,176 shares of Common Stock to Mr. Furlow.
Effective September 30, 2019, Bart Mitchell, the Company’s Chief Financial Officer, was appointed Chief Executive Officer of the Company. In connection with his appointment, Mr. Mitchell entered into an Employment Agreement with the Company as of October 1, 2019 for the term of one year. In addition to cash compensation, he was entitled to receive stock grants valued at the lesser of $15,000 or 200,000 Shares of Common Stock on the last day of the completed year of employment. Mr. Mitchell continued to serve as a member of the Board of Directors of the Company, but no longer served as the Company’s Chief Financial Officer. On September 30, 2019, the Company approved the issuance of 166,667 shares to Mr. Mitchell pursuant to his prior employment agreement for compensation earned during the year ended September 30, 2019. Mr. Mitchell resigned as President on June 8, 2020. At such time he received a severance package of $50,000. During fiscal year 2020, Mr. Mitchell no longer wanted his 279,406 shares and returned them to the Company for no consideration and then the Company cancelled them.
On September 27, 2019, in connection with their service on the Board of Directors for fiscal years 2017, 2018 and 2019, the Company approved the issuance of (i) 99,362, (ii) 272,472, (iii) 112,739 and (iv) 272,472 shares of Common Stock to Blake Furlow, Gary Herman, Bart Mitchell and JoyAnn Kenny-Charlton, respectively as well as a total of cash payments of $85,041.
Christopher Rego has been a director since February 5, 2020, and our Chief Executive Officer since May 1, 2020. Prior to his appointment, Mr. Rego purchased an active franchise in California. During the year ended September 30, 2020 the Company recognized royalty revenue from the franchise of $16,650 and recognized marketing fee revenue from the franchise of $829. Total payments made by the franchisee were $7,681. As of September 30, 2020 and 2019 the accounts receivable balance with the franchise was $11,894 and $21,536, respectively and the franchises had deferred revenue balances of $0.
John Simento has been a director of the Company since May 19, 2020. Prior to Mr. Rego’s and Mr. Simento’s appointments with the Company, they purchased a Company franchise in the United Arab Emirates (the “UAE”). The Company filed an arbitration complaint against them in December 2019 regarding issues related to opening the franchise. The complaint was resolved by a Settlement Agreement dated February 5, 2020. Under the Settlement Agreement, the Company forgave all back royalty fees through July 2019, equally $18,825, and agreed to defer all other fees until the franchise was able to obtain a business license to operate in the U.A.E., which is currently delayed due to the Coronavirus pandemic. The franchise is currently non-operational as a result of an inability to obtain the issuance of a business license form the UAE due to the Coronavirus pandemic. If the franchise is not able to procure the necessary authorizations to operate, the franchisees would not owe any franchise fees. As a consequence, we have not realized any revenue from the franchise.
Mr. Rego is also the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10, 2020. The term of the agreement is nine months and calls for a development fee of $12,900 per month. During the year ended September 30, 2020 the Company paid seven monthly payments of $12,900 in accordance with the terms of the agreement and paid an additional $15,700 for additional services, for a total of $106,000.
On or about December 6, 2019, Christopher Rego and Rod Whiton (the “Solicitors”), prior to their appointments as officers or directors of the Company, commenced a consent solicitation to the shareholders of the Company and on February 5, 2020, the Company and the Solicitors entered into an agreement to settle their dispute over the consent solicitation. The settlement resulted in the Company paying $10,000 as reimbursement for certain costs that they incurred related to the consent solicitation, the Company agreeing to appoint Mr. Rego and Mr. Whiton to the board, and the Company’s agreeing to appoint Mr. Rego as chief executive officer, among other provisions. The Company ultimately paid a total of $20,000 in costs incurred by Messrs. Rego and Whiton in relation to the consent solicitation.
F-12
(4) Property and Equipment
Property and equipment consisted of the following:
| September 30, | ||||||||
| Description | 2020 | 2019 | ||||||
| Depreciable Property and Equipment: | ||||||||
| Equipment | $ | 76,434 | $ | 76,434 | ||||
| Furniture and Fixtures | 83,427 | 83,427 | ||||||
| Property and Improvements | — | 127,723 | ||||||
| Software | 418,570 | 418,572 | ||||||
| Total Depreciable Property and Equipment | 578,431 | 706,156 | ||||||
| Accumulated Depreciation | (446,813 | ) | (382,367 | ) | ||||
| Total Net Property and Equipment | $ | 131,618 | $ | 323,789 | ||||
Prior to the end of fiscal 2018, the Company listed one of its owned condominiums for sale located at 701 Market Street, Suite 113, St. Augustine, FL for $98,900. Property and equipment of $43,178 related to the net book value of this asset was classified as Assets Held for Sale in the Consolidated Balance Sheet at September 30, 2018. This condominium was sold in November 2018 for proceeds of approximately $86,000, therefore a gain on the sale of assets of approximately $43,000 was recorded in other income on the statement of operations.
On July 9, 2019 the Company completed the sale of a condominium conference space listed for sale for proceeds of $60,000 and recorded a gain of approximately $22,000 which represented the excess of the proceeds over the carrying value on that date.
On October 30, 2019, the Company completed the sale of a condominium conference space for proceeds of approximately $100,000 and recorded a gain of approximately $21,000, which represented the excess of the proceeds over the carrying value on that date.
Depreciation expense totaled approximately $113,000 and $116,000, respectively, for the years ended September 30, 2020 and 2019.
(5) Notes and Other Receivables
At September 30, 2020 and 2019, respectively, the Company held certain notes receivable totaling approximately $100,000 and $94,000 respectively for extended payment terms of franchise fees. The Company had an allowance on notes receivable of $91,000 and $91,000 as of September 30, 2020 and 2019, respectively. The net notes receivable was approximately $9,000 and $3,000 and was included in the consolidated balance sheet as of September 30, 2020 and 2019 respectively. The notes were generally non-interest-bearing notes with monthly payments, payable within one to two years.
| 2020 | Total | |||||||
| Payment schedules for Notes Receivable | $ | 100,000 | $ | 94,000 | ||||
F-13
(6) Accrued Liabilities
The Company had accrued liabilities at September 30, 2020, and September 30, 2019 as follows:
| Accrued Liabilities | September 30, 2020 | September 30, 2019 | ||||||
| Accrued Board Compensation | $ | 5,000 | $ | 85,041 | ||||
| Accrued Compensation and payroll taxes | 3,743 | 10,679 | ||||||
| Accrued Severance | — | 30,000 | ||||||
| $ | 8,743 | $ | 125,720 | |||||
(7) Stock-Based Compensation
In December 2017, the Company granted a total of 14,286 warrants to two Directors of the Company. These warrants were granted in conjunction with the issuance of standby letters of credit from the two directors. The warrants had an exercise price of $0.14 per share and expired five years from the date of grant. These warrants were valued using the Black Scholes method. The fair value of the warrants on the date of grant were $2,000, and the warrants vested immediately. The Company expensed $2,000 in connection with the grant during the year ended September 30, 2018. These warrants were exercised in September 2019 for 14,286 shares of common stock. The Company agreed to waive the $2,000 exercise price owed in total from these warrant holders.
On March 27, 2019 and July 19, 2019, the Company approved the issuance of 13,265 and 13,788 shares of common stock, respectively, to a former President of the Company due to a calculation error in relation to her terminated employment agreement. All equity compensation relating to this agreement was properly fully recognized during the year ended September 30, 2017.
On March 21, 2019, the Company agreed to cancel 260,630 outstanding stock options granted to the former President of the Company in connection with her terminated employment agreement and grant her 294,778 new options. The Company utilized the Black-Scholes valuation model for estimating fair value of these new options. Each grant was evaluated based upon assumptions at the time of the grant. The assumptions used in the calculations included no dividend yield, expected volatility of approximately 110%, a risk-free interest rate of 2.34%, and an expected term of 5 years. The dividend yield of zero is based on the fact that the Company does not pay cash dividends and has no present intention to pay cash dividends. Expected volatility is estimated based on the Company’s historical stock prices over a period equivalent to the expected life in years. The risk-free interest rate is based on the U.S. Treasury’s Daily Treasury Yield Curve Rates at the date of grant with a term consistent with the expected life of the options granted. The expected term calculation is based on the “simplified method” allowed by the Securities and Exchange Commission (the “SEC”), due to no applicable historical exercise data available. The fair value of these new stock options did not exceed the fair value of the initially granted options. As per FASB ASC 718-20-35, additional compensation cost is required to be recorded for any incremental value between the initial equity award and any modifications, therefore no additional compensation was recorded for these new stock options.
Effective September 30, 2019, Blake Furlow resigned as Chief Executive Officer of the Company. Mr. Furlow received a severance payment of $30,000 pursuant to the terms of a Severance Agreement. Pursuant to his employment agreement, the Company also issued an aggregate of 566,176 shares of Common Stock to Mr. Furlow valued at $35,000.
Effective September 30, 2019, Bart Mitchell, the Company’s Chief Financial Officer, was appointed Chief Executive Officer of the Company. In connection with his appointment, Mr. Mitchell entered into an Employment Agreement with the Company as of October 1, 2019 for the term of one year. In addition to cash compensation, he was entitled to receive stock grants valued at the lesser of $15,000 or 200,000 Shares of Common Stock on the last day of the completed year of employment. Mr. Mitchell continued to serve as a member of the Board of Directors of the Company, but no longer served as the Company’s Chief Financial Officer. On September 30, 2019, the Company approved the issuance of 166,667 shares to Mr. Mitchell pursuant to his prior employment agreement for compensation earned during the year ended September 30, 2019, which were valued at $10,000. Mr. Mitchell resigned as President on June 8, 2020. At such time he received a severance package of $50,000.
On September 27, 2019, in connection with their service on the Board of Directors for fiscal years 2017, 2018 and 2019, the Company approved the issuance of (i) 99,362, (ii) 272,472, (iii) 112,739 and (iv) 272,472 shares of Common Stock to Blake Furlow, Gary Herman, Bart Mitchell and JoyAnn Kenny-Charlton, respectively, for a value of $45,423, as well as a total of cash payments of $85,041.
The following table represents option activity during the years ended September 30, 2020 and 2019:
| Weighted | ||||||||||||||||
| Weighted | Average | Weighted | ||||||||||||||
| Number of | Average Exercise | Remaining Life | Average Grant Date | |||||||||||||
| Options | Price | (years) | Fair Value | |||||||||||||
| Vested and Exercisable at September 30, 2018 | 2,143,423 | $ | 0.28 | 3.68 | $ | 0.16 | ||||||||||
| Cancelled options | (260,630 | ) | $ | 0.20 | — | — | ||||||||||
| Options granted March 21, 2019 | 294,778 | $ | 0.16 | — | $ | 0.05 | ||||||||||
| Vested and Exercisable at September 30, 2019 | 2,177,571 | $ | 0.26 | 2.89 | $ | 0.15 | ||||||||||
| Cancelled options | — | $ | — | — | — | |||||||||||
| Options granted | — | $ | — | — | $ | — | ||||||||||
| Vested and Exercisable at September 30, 2020 | 2,177,571 | $ | 0.27 | 1.89 | $ | 0.15 | ||||||||||
The following table represents all outstanding options as of September 30, 2020:
| Weighted | ||||||||||||||||||
| Average | Average | Average | ||||||||||||||||
| Number of | Exercise | Expiration | Remaining | Grant Date | ||||||||||||||
| Options | Price | Date | Life (years) | Fair Value | ||||||||||||||
| Granted May 13, 2017 | 1,764,000 | $ | 0.30 | 05/13/22 | 1.62 | $ | 0.17 | |||||||||||
| Granted September 30, 2017 | 118,793 | $ | 0.18 | 09/30/22 | 2.00 | $ | 0.13 | |||||||||||
| Granted March 21, 2019 | 294,778 | $ | 0.17 | 03/19/24 | 3.47 | $ | 0.05 | |||||||||||
| Vested and Exercisable at September 30, 2019 | 2,177,571 | $ | 0.23 | $ | 0.15 | |||||||||||||
F-14
(8) 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 October 2, 2015, the Company filed suit in the state court in St. John’s County, Florida, Case No. CA 15-1076, against its former Chief Executive Officer Brian Pappas, Christine Pappas, its former Human Resources officer, and an independent company controlled by Mr. Pappas named Franventures, LLC (“Franventures”). The lawsuit seeks return of Company emails and other electronic materials in the possession of the defendants, Company control over the process by which the Company’s documents are identified, and a court judgment that the property is the Company’s. Mr. and Mrs. Pappas have returned certain Company documents that they have identified, but other issues remain. On December 11, 2017, Brian Pappas filed a counterclaim alleging the Company is required to indemnify him for a multitude of matters. On October 8, 2020 the Court dismissed Brian Pappas’ indemnity counterclaim without prejudice.
In a separate suit, filed on March 7, 2016 in the state court in St. John’s County, Florida (Case No. CA 16-236), Franventures, LLC (“FV”) filed suit against the Company alleging that it is due an unstated amount of money from the Company pursuant to a contract the Company had previously terminated. On June 23, 2016, the Company filed a counterclaim against Franventures, which also included a complaint against former Chairman of the Board and Chief Executive Officer Brian Pappas. The counterclaim seeks redress for losses and expenditures caused by alleged fraud, conversion of company assets, and breaches of fiduciary duty that the Company alleges that defendants perpetrated upon CLC, including assertions regarding actions by Brian Pappas that the Company alleges occurred while Mr. Pappas was serving as the Chief Executive Officer of CLC and as a member of its board of directors. The Company is actively litigating this matter. On October 27, 2016, Brian Pappas filed a motion to amend the complaint in Case No. CA 16-236 to add a claim alleging that the Company slandered him by virtue of a press release issued on or about August 1, 2016, in which the Company reported to shareholders on steps it had taken and improvements it had implemented. The motion has still not been ruled upon by the Court. If Mr. Pappas is granted the right to amend his complaint and does so, the Company will vigorously defend the proposed claim.
The Company’s complaint against Mr. Pappas and Franventures (Case No. CA 15-1076) has been consolidated with Mr. Pappas’ and Franventures’ complaint against the Company (Case No. CA 16-236) for purposes of discovery, but not for any other purpose.
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.
On November 8, 2017, franchisee, Indy Bricks, LLC, along with its two owners, Ben and Kate Schreiber, initiated arbitration against the Company (American Arbitration Association, Case No. 01-17-0006-8120). The Plaintiffs allege breach of contract, fraud, material misrepresentations and omissions, violations of the Indiana Franchise Act, and violations of the Indiana Deceptive Franchise Practices Act. On April 23, 2020, a settlement agreement was entered into between the Plaintiffs and the Company under which the arbitration was dismissed. Pursuant to the settlement agreement, Indy Bricks, LLC will pay the Company an agreed amount of past due franchise fees, monthly marketing and royalty fees, and monthly fees to utilize the Company’s franchise management software.
On December 6, 2019, the Company initiated arbitration against two franchise owners. This case was settled on February 5, 2020.
In July 2019, the Company entered into an operating agreement for a joint venture known as Bricks4Schoolz, LLC, with BPL Enterprises for Bricks4Schoolz LLC (“BPL”). Under the operating agreement, the joint venture is granted a license to distribute certain intellectual property of the Company through a software system developed by BPL for the joint venture, provided that the joint venture may only distribute the intellectual property to elementary and middle schools in territories which are not covered by an existing franchisee of the Company. Due to disputes regarding the scope of the license, and the fact that neither Bricks4Schoolz, LLC or BPL were legal entities at the time the operating agreement was executed, the Company has rescinded the operating agreement.
F-15
(9) Income Taxes
The components of the deferred tax assets at September 30, 2020 and September 30, 2019 were as follows:
| 2020 | 2019 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for bad debt | $ | 79,399 | $ | 191,083 | ||||
| Charitable contributions | 127 | 127 | ||||||
| Stock-based compensation | 87,675 | 87,675 | ||||||
| Foreign tax credit | 149,238 | 123,127 | ||||||
| Net operating loss | 463,512 | 283,342 | ||||||
| Total gross deferred tax asset | 779,951 | 685,355 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation timing difference | (16,614 | ) | (31,324 | ) | ||||
| ASC 606 Adjustment | (797,356 | ) | (797,356 | ) | ||||
| Total deferred tax liability | (813,970 | ) | (828,680 | ) | ||||
| Gross net deferred tax asset | (34,019 | ) | (143,325 | ) | ||||
| Less: Valuation allowances | 34,019 | 143,325 | ||||||
| Net deferred tax asset | $ | — | $ | — | ||||
The Company has recorded various deferred tax assets and liabilities as reflected above. In assessing the ability to realize the deferred tax assets, management considers, whether it is more likely than not, that some portion, or all of the deferred tax assets and liabilities will be realized. The ultimate realization is dependent on generating sufficient taxable income in future years. The valuation allowance is equal to 100% of the net deferred tax asset. Given 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.
The components of the provisions for income taxes for the fiscal years ended September 30, 2020 and 2019 are as follows:
| 2020 | 2019 | |||||||
| Current: | ||||||||
| Federal | $ | — | $ | — | ||||
| State | — | — | ||||||
| Total | — | — | ||||||
| Deferred: | ||||||||
| Additional deferred tax related to book tax differences | (179,955 | ) | 109,081 | |||||
| Valuation allowance | 179,955 | (109,081 | ) | |||||
| Total tax provision | $ | — | $ | — | ||||
A reconciliation of the provisions for income taxes for the fiscal years ended September 2020 and 2019 as compared to statutory rates is as follows:
| 2020 | 2019 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Provision at statutory rates | $ | (141,072 | ) | 19.85 | % | $ | 30,835 | 19.85 | % | |||||||
| State income tax, net of federal benefit | (39,098 | ) | 5.50 | % | 8,546 | 5.50 | % | |||||||||
| Penalties | — | 0.00 | % | — | 0.00 | % | ||||||||||
| Meals & entertainment | 215 | -0.03 | % | 2,923 | 1.88 | % | ||||||||||
| Stock-based compensation | — | 0.00 | % | — | 0.00 | % | ||||||||||
| Tax credits | — | 0.00 | % | — | 0.00 | % | ||||||||||
| Other tax differences | — | 0.00 | % | — | 0.00 | % | ||||||||||
| Change in rate | — | 0.00 | % | — | 0.00 | % | ||||||||||
| Valuation allowance on deferred tax assets | 179,955 | -25.3 | % | (42,304 | ) | -27.2 | % | |||||||||
| Total income tax provision | $ | — | 0.00 | % | $ | — | 0.00 | % | ||||||||
F-16
(10) Note Payable
On April 28, 2020, the Company was granted a loan (the “Loan”) from First Bank of the Lake in aggregate amount of $119,980, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The Loan, which was in the form of a Note dated April 24, 2020 issued by the Company, matures on April 23, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on October 23, 2020. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, cost used to continue group health care benefits, mortgage payments, rent, utilities and interest on other debt obligations incurred before February 15, 2020. The Company used the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.
(11) Subsequent Events
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 such events requiring recognition or disclosure in the financial statements.
F-17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: December 30, 2020 | By: | /s/ Rod Whiton |
| Rod Whiton, President | ||
| (Principal Executive Officer) | ||
| Dated: December 30, 2020 | By: | /s/ Mike Elkin |
| Mike Elkin, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| Signature | Title | Date | ||
| /s/ Christopher Rego | Director and Chief Executive Officer | December 30, 2020 | ||
| Christopher Rego | ||||
| /s/ JoyAnn Kenny-Charlton | Director | December 30, 2020 | ||
| JoyAnn Kenny-Charlton | ||||
| /s/ Rod Whiton | President and Director | December 30, 2020 | ||
| Rod Whiton | ||||
| /s/ John Simento | Director | December 30, 2020 | ||
| John Simento | ||||
| /s/ R. Gary Zell, II | Director | December 30, 2020 | ||
| R. Gary Zell, II |
39