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, 2018

 

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)

 

701 Market Street, Suite 113

St. Augustine, FL 32095

(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, 2018 (the last trading day of the registrant’s second quarter), the aggregate market value of the common stock held by nonaffiliates of the registrant, based on the $0.14 closing price of the registrant’s common stock as reported on the OTC bulletin board on that date, was approximately $1.8 million. 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.

 

At July 10, 2019, there are 12,089,140 shares of common stock of the registrant outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosures 17
     
PART II  
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6. Selected Financial Data 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26
Item 9A. Controls and Procedures 27
Item 9B. Other Information 28
     
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 29
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 32
Item 13. Certain Relationships and Related Transactions, and Director Independence 33
Item 14. Principal Accounting Fees and Services 33
     
PART IV  
     
Item 15. Exhibits and Financial Statement Schedules 34
Item 16. Form 10-K Summary 34

 

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; and

 

● our failure to comply with current or future laws or regulations.

 

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

 

 

PART I

 

Item 1. Business

 

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. At September 30, 2018, the Company had 526 Bricks 4 Kidz® and Sew Fun Studios® franchise locations and 31 Bricks 4 Kidz® master franchises which operate 124 Bricks 4 Kidz® sub-franchises in 45 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 third 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.

 

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, 2018, BFK had 526 franchise territories and 31 master franchises which operate 124 sub-franchises operating in 41 states, the District of Columbia, Puerto Rico, and 45 foreign countries. The following table details franchise activity:

 

BFK
    Franchise
Territories 		 
       
September 30, 2016     698  
Additions     22  
Terminations and non-renewals and cancellations     (80 )
September 30, 2017     640  
Additions     7  
Terminations and non-renewals and cancellations     (90 )
September 30, 2018     557  

 

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 instruction 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 $25,900. If the franchisee is granted an additional geographic area to increase the size of their territory, then the franchisee must pay an additional fee in the amount of $10,000. If the franchisee is in good standing and is granted a second or additional franchise, then the franchisee must pay a franchise fee in the amount of $18,000 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, 2018, BFK sold one master franchise for $36,000. 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 advertising 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 to 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. 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

 

 

Based upon the number of franchise territories owned and the length of time the franchisee has been in operation, historically, domestic and international franchisees were required to pay BFK a royalty fee amounting to 7% of gross receipts reported in the Franchise Management Tool (“FMT”). BFK also received a percentage of royalty payments received by master franchisees from their sub-franchisees. Franchisees were billed monthly for their 7% royalty payments, based upon gross receipts, due to the Company. The franchisees were required to pay the Company a minimum royalty fee per each franchise territory they own. Billing of the minimum royalty fee amount to each franchisee took place every 12 weeks and the minimum amount was calculated by comparing the amounts between the regular royalties billed for the prior 12 weeks to the 12 week minimum royalty payment due to the Company, per the franchise agreement. The 12-week minimum royalty payment due to the Company was $1,500 for the first franchise territory owned (equating to a minimum average fee of $500 per month) and $750 for the second franchise territory owned (equating to a minimum average fee of $250 per month). The minimum amount due for the third franchise territory was $1,500 and the fourth franchise territory was $750. After the end of each 12-week period, franchisees are required to pay to the Company the amount, if any, by which the minimum royalty exceeds the sum of the royalties paid over the 12-week period, per the franchise agreements prior to October 1, 2015.

 

Beginning October 1, 2015, the Company adopted a flat-fee approach, eliminating the previous approach based upon revenue collections by the franchisee. The Company made the change to a flat-fee approach for a variety of reasons, including without limitation: to better enable franchisees to manage their cash flow; to enrich relations with our franchisees by being responsive to their needs; to facilitate the Company’s ability to collect minimum fees across the board; and to make the Company’s fee structure more attractive to new potential franchisees.

 

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, 2015 through September 30, 2016   $ 400 USD  
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 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, 2015 through September 30, 2016   $ 200 USD  
October 1, 2016 through September 30, 2017   $ 225 USD  
October 1, 2017 and for the remainder of the initial term of the Franchise Agreement   $ 250 USD  

 

On September 30, 2016, the Company implemented a new royalty fee structure for all new franchise sales. Sales in progress were grandfathered in under the previous royalty structure. The new royalty structure is the greater of 7% of gross sales or $500 per month.

 

Each franchisee has been given the option to amend their franchise agreement contract and elect this new royalty fee structure. Less than 2% of franchisees did not agree to amend their franchise agreements to the new program. Any franchisees which did not elect the new royalty fee structure will remain subject to the historic royalty structure described above.

 

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 accounted for separately and are not reported as revenue or expenses for BFK. 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. The Company is actively working with these franchisees in the current period to acquire accurate reporting and to bring their accounts to a current status. The Company has built its own software and franchisees are migrating to the new software. Collection and reconciliation of marketing fees will be streamlined with the new software.

 

BFK Competition

 

Although BFK pioneered the LEGO® modeling-based curriculum for after school 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

 

The Company is in the process of revising SF’s form of franchise agreement to address common franchise issues consistent with best practices. SF filed state-required initial, amended or renewal franchise materials during the 2nd quarter of fiscal year 2018. Franchises sold under this franchise concept operate businesses offering creative project-based activities, classes and programs in fashion and interior design and sewing to children and adults at locations such as elementary and middle schools, camps, social events, community centers and churches. At September 30, 2018, SF had 4 franchise territories in locations and states that do not require registration. The franchises are in two states and Puerto Rico, as well as one franchisee in Ireland. The FDD has been completed and has been filed; the Company has begun sales activities in states that do not require additional registrations.

 

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. See Item 11, “Executive Compensation — Summary Compensation Table” and Item 13, “Certain Relationships and Related Transactions, and Director Independence.”

 

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.

 

Going Concern

 

The Company had losses of $218,833 in the current year. The Company had incurred accumulated losses of $2,391,525 as of September 30, 2018. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

Based on the Company’s cash balance at September 30, 2018 and projected cash needs for the next 12 months from the issuance date of these financial statements, management believes that the Company will need to increase revenues, reduce costs and/or pursue other transactions to be able to continue to fund operating and capital requirements. The Company plans to implement cost cutting measures, including reducing personnel, reducing legal and professional expenses, moving the company’s central location to Boise, ID, selling Company owned real estate, and incorporating technology where economic opportunity presents. The Company plans to expand its offerings to allow current franchisees to operate in unoccupied territories for a yearly fee plus a monthly percentage of revenue (see Note 10). However, should the current legal issues or unforeseen legal actions prevail against the Company, or a drastic downturn in the economy become actual, the Company expects that profitability would be affected. At such time, the Company would need to secure loans, lines of credit or other means to raise operating capital. The Company cannot be sure that it will be able to obtain any such additional funds by any of the foregoing or other means, and any such funds it may obtain may not be sufficient. If the Company is unable to obtain sufficient funds, it may be unable to continue as a going concern.

 

General

 

The Company’s offices, consisting of approximately 4,500 square feet, are located in an office/condo complex at 701 Market, Suite 113, St. Augustine, FL 32095. The Company owns three of the office condominiums and rents one additional unit.

 

Subsequent to year end, the Company sold one of its office condominiums in Florida and transitioned to a Boise, Idaho location for which a new month-to-month office lease was signed.

 

At September 30, 2018, the Company had 8 employees on a full time basis.

 

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

 

 

Item 1A. Risk Factors

 

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

 

We may fail to continue as a going concern.

 

As discussed elsewhere in this Annual Report on Form 10-K, our management has concluded that certain conditions and events that we face raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern depends upon many factors, including our ability to increase our revenues, reduce our costs and/or pursue other transactions, including seeking to reduce our operating leverage and sell assets, to be able to continue to fund our operating and capital requirements and meet our debt obligations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. We cannot be sure that we will be able to obtain any such needed additional funds by any of the foregoing or other means, and any such funds we may obtain may not be sufficient. If we are unable to obtain sufficient funds, we may be unable to continue as a going concern.

 

Our revenues decreased in fiscal year 2018 as compared to fiscal year 2017

 

Our revenues decreased slightly in fiscal year 2018 to $2,416,726 from $2,456,033 in the prior year, a decrease of $39,307 or 2%, primarily due to lower overall franchise sales. We have incurred losses in current year and prior years, and cannot be certain that we can generate sufficient revenues to achieve profitability in the future. Continued losses or decreased revenues may impair our ability to attract new franchisees and maintain positive working relationships with our current franchisees. In addition, if we continue to incur losses, we may need to seek additional financing which could be dilutive to our stockholders.

 

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, the Company altered its royalty fee structure beginning and effective October 1, 2015, changing 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.

 

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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.

 

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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 work force, 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. Unless we are able to increase our revenues or decrease our operating expenses from recent historical run-rate levels, we expect that we may need to obtain additional capital during fiscal year 2019 to fund our planned operations. If our cash flows from operations do 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. To ensure that the Company has sufficient liquidity, the Company received confirmation letters as further described under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.

 

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.

 

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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.

 

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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, advertising 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.

 

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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.

 

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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.

 

On September 15, 2018, Christian Miller resigned as Chief Operating Officer and Chief Financial Officer of the Company. Accordingly, the Company recruited additional senior management. Because of the intense competition for these 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.

 

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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 July 10, 2019, our executive officers, directors, significant shareholders and affiliated persons and entities collectively, beneficially owned approximately 20.2% 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 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-Qs for the subsequent three quarters, 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.

 

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Item 2. Properties

 

As of September 30, 2018 the Company’s offices, consisting of approximately 4,500 square feet, were located in an office/condominium complex in St. Augustine, Florida. The Company owns three of the office condominiums and rents one additional unit.

 

Subsequent to year end, the Company sold one of its office condominiums in Florida and transitioned to a Boise, Idaho location for which a new month-to-month office lease was signed. The Company believes it can streamline its operations by selling their owned facilities and leasing office space and training space as needed.

 

Item 3. Legal Proceedings

 

From time to time, the Company has been and may become involved in legal proceedings arising in the ordinary course of its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

 

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. The Company denies the allegation and is actively litigating this matter.

 

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”) alleged 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 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 does amend his complaint, the Company will vigorously defend the proposed claim.

 

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. The same Plaintiffs also initiated arbitration 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.

 

On May 9, 2017, franchisee, Back and 4th, LLC, along with its owner, Kristena Bins-Turner, initiated arbitration against the Company for breach of contract, alleging that they did not receive adequate value for royalty payments made under the franchise agreement, for fraud, alleging material misrepresentations and omissions prior to entry into the franchise agreements, and for misrepresentation violations of Florida Statute 817.416. (American Arbitration Association, Case. No. 01-16-004-3745). Franchisee and its owner seek an unspecified amount of damages. The Company contested the allegations and its liability for any damages at an evidentiary hearing held December 5-7, 2017. This matter has been settled for $45,500 and included in other general and administrative expenses in the consolidated statement of operations the year ended September 30, 2018.

 

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On August 21, 2017, the SEC filed a Civil Complaint against the Company and certain former executive officers and directors in the United States District Court for the Middle District of Florida, Jacksonville Division, as Civil Action No. 3:17-cv-00954-TJC-JRK. The Civil Complaint was in regards to alleged violations of federal securities law occurring between 2011 and 2015. On August 22, 2017, the SEC also filed with the court the Company’s formal Consent to a full resolution of all allegations pertaining to the Company. Pursuant to the Consent, without admitting or denying the allegations, the Company agreed to the entry of a final judgment that permanently enjoins it from violating the sections of the federal securities laws listed in the Civil Complaint. On September 20, 2017, the United States District Court for the Middle District of Florida, Jacksonville Division issued the final judgment order as to the Company in the Civil Action No. 3:17-cv-00954-TJC-JRK. The entering of the final judgment order has resolved all allegations pertaining to the Company. The Company was not assessed any monetary penalties. Various law firms worked on this case. As stated in the above, this matter is resolved and closed.

 

On September 21, 2017, the Company filed a notice of voluntary dismissal without prejudice in the United States District Court for the Middle District of Florida, Jacksonville Division, in its lawsuit against Blake and Anik Furlow relating to their conduct in the shareholder consent the complaint on May 15, 2017, and after consideration, decided it was not in the best interest of the Company to proceed with the litigation. Greenbrerg Traurig was the firm used for this action. The action is closed. The dismissal is public record and is case # 3:17-cv-00552.

 

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). 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. The Company is vigorously contesting the allegations and its liability for any damages.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

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 OTC bulletin board under the symbol “CLCN.”

 

At July 10, 2019, the Company had 12,089,140 outstanding shares (12,154,240 shares issued less 65,100 shares held by the Company as treasury) of common stock and 133 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 

 

None.

 

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

 

We did not purchase any of our equity securities during 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.

 

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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

 

The Company experienced a year of decline in the number of franchises, compared to fiscal year 2017, decreasing from 640 franchise territories to 557, within the two brands. The reduction in the growth rate of franchises sold in fiscal year 2018 resulted in a decrease in initial franchise fees of approximately $15,447, in a year-to-year comparison. The decrease in franchise sales was due to a lack of marketing sales worldwide and more stringent qualification procedures. The loss of the territories during the period is the result of the company working to discharge our non-performing franchisees from the system.

 

The Company’s royalty fees revenue decreased to $2,207,442 in fiscal year 2018 from $2,249,023 in the prior year, a decrease of $41,581 (2%), primarily due to lower initial franchise sales, as the Company sold only 6 new U.S. Franchises during the fiscal year 2018 and 1 International Franchise. Operating Expenses decreased to $2,625,144 in fiscal year 2018 from $3,148,485 in the prior year, a decrease of $580,262 primarily due to significant decreases in professional fees & legal settlements of $718,601 and stock based compensation of $358,738, offset by an increase in bad debt expense of $555,302 year over year. The Company had a net loss of $218,833 in fiscal year 2018, down from a net loss of $1,031,002 the prior year, a change of $812,169 primarily due to the lower operating expenses and provision for income taxes.

 

During fiscal year 2018, the Company, in accordance to 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.

 

Results of Operations

 

The following table represents the Company’s franchise sales activity for the fiscal years ended September 30, 2018 and 2017:

 

    Franchises Sold  
    Fiscal Years Ended  
Franchise Activity   September 30  
Creative Learning Corporation   2018     2017  
BFK Franchise Company LLC      
(a) US First Territories     3       -  
(b) US Second Territories     3       -  
Total US     6       -  
                 
International First Territories     1       -  
International Second Territories     -       -  
Master Agreements     -       3  
Master Sub-franchise     -       19  
Total International     1       22  
Total BFK     7       22  
                 
SF Franchise Company LLC                
US First Territories     -       -  
International Territories     -       -  
Total SF     -       -  
                 
Total Franchises Sold     7       22  

 

(a) US First Territory refers to the original territory purchased with the Franchise Agreement, for example, the franchisee would be charged $25,900 for the first territory.
(b) Second Territory refers to a secondary territory purchased in addition to the territory purchased with the Franchise Agreement, for example, the franchisee would be charged $10,000 for a second territory.

 

Material changes of items in the Company’s Statement of Operations for the fiscal year ended September 30, 2018 as compared to the prior year are discussed below.

 

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Initial franchise fees, Royalty fees and Merchandise sales

 

    Fiscal year Ended
    Increase/   (rounded to $1,000)     Change  
Item Description   Decrease   09/30/18     09/30/17     Amount     %  
Revenue                            
Initial franchise fees   Decrease   $ 192,000     $ 207,000     $ (15,000 )     7 %
Royalties fees   Decrease   $ 2,207,000     $ 2,249,000     $ (42,000 )     2 %
Merchandise sales   Increase   $ 18,000       -     $ 18,000       100 %
Total Revenue   Decrease   $ 2,417,000     $ 2,456,000     $ (39,000 )     2 %

 

Contributing to the decline in initial franchise fees of approximately $15,000 or 7%, was the lack of US franchise sales in 2017 and into 2018 due to the slow progression of resuming US sales after their suspension from January through September of 2016. The decrease in royalty fees is only 2% from the prior year. This fluctuation is due to the loss of some franchisees that the Company has not been able to replace with the sales of new franchises. The loss of the territories during the period is the result of the Company working to discharge our non-performing franchisees from the system. The Company began selling merchandise in the year ended September 30, 2018. The merchandise was made up of lanyards and other promotional items.

 

Operating Expenses

 

Total operating expenses for the comparable periods ended September 30, 2018 and 2017 were approximately $2,625,000 and $3,148,000, respectively, a decrease of approximately $523,000.

 

    Fiscal Year Ended September 30,
Item Description   Increase/ Decrease   2018     2017     Amount     Change %  
Franchise consulting & commissions   Decrease   $ 50,000     $ 162,000        (112,000 )        -69 %
Salaries and payroll taxes   Decrease     696,000       1,077,000       (381,000 )     -35 %
Advertising expenses   Increase     30,000       21,000       9,000       43 %
Professional fees & legal settlements   Decrease     598,000       1,317,000       (719,000 )     -55 %
Bad debt expense   Increase     733,000       177,000       556,000       314 %
All other G&A expenses   Increase     518,000       394,000       124,000       31 %
        $ 2,625,000     $ 3,148,000                  

 

The changes in significant operating expenses are explained as follows:

 

Franchise consulting and commissions

 

    Fiscal Year Ended  
    Increase/   (rounded to $1,000)     Change  
Item Description   Decrease   09/30/18     09/30/17     Amount     %  
Franchise consulting & Commissions   Decrease   $ 50,000     $ 162,000     $ 112,000       -69 %

 

The payments for commissions and consulting fees declined primarily as a result of the reduction in the sales of new franchises during fiscal year 2018 and the use of fewer consultants in 2018.

 

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Salaries and payroll taxes

 

    Fiscal Year Ended  
    Increase/   (rounded to $1,000)     Change  
Item Description   Decrease   09/30/18     09/30/17     Amount     %  
Salaries and payroll taxes   Decrease   $ 696,000     $ 1,077,000     $ (381,000 )     -35 %

 

The Company paid salaries and payroll expenses for the fiscal years ended September 30, 2018 and 2017 of approximately $694,000 and $717,000, respectively, a decrease of approximately $23,000, or 3%. The decrease in total payroll expenses reflects the decrease in the Company’s staff levels during the fiscal years ended September 30, 2018 and 2017, with average full-time employees of approximately 10 and 13 during fiscal 2018 and fiscal 2017, respectively.

 

Also included in salaries and payroll taxes is stock-based compensation which decreased from $361,000 to $2,000 in the years ended September 30, 2017 and 2018, respectively. In December 2017, the Company granted 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 for a total amount of $100,000. 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 quarter ended December 31, 2017. The Company awarded stock options to the Board during the year ended September 30, 2017, as well as stock grants and options to Company officers pursuant to employment agreements.

 

Advertising expenses

 

    Fiscal Year Ended  
    Increase/   (rounded to $1,000)     Change  
Item Description   Decrease   09/30/18     09/30/17     Amount     %  
Advertising   Increase   $ 30,000     $ 21,000     $ 9,000       42 %

 

The Company paid advertising expenses for the fiscal years ended September 30, 2018 and 2017 of approximately $30,000 and $21,000, respectively, an increase of approximately $9,000, or 42%. The increase related to the implementation of more lead advertising particularly through social media channels. The Company had slowed lead advertising during fiscal 2017 to further evaluate its effectiveness and to strategically choose the most efficient use of these dollars. For 2018, the Company continued to evaluate for effective uses of advertising capital.

 

Professional fees & legal settlements

 

    Fiscal Year Ended  
    Increase/   (rounded to $1,000)     Change  
Item Description   Decrease   09/30/18     09/30/17     Amount     %  
Professional fees & legal settlements   Decrease   $ 598,000     $ 1,317,000     -$ 719,000       55 %

 

The Company paid professional fees and legal settlements for the fiscal years ended September 30, 2018 and 2017 of approximately $598,000 and $1,317,000, respectively, a decrease of approximately $719,000, or 55%.

 

The decrease in professional legal fees is primarily due to the elevated level of professional fees in the prior years. The professional fees in fiscal year 2017 were due predominantly to SEC related matters, Franchise regulatory matters and corporate governance matters that resulted from the prior management’s decisions.

 

Also included in this account were accounting fees of approximately $136,000 and $114,000, respectively, in fiscal year 2018 and 2017. The increase in professional accounting fees is primarily due to increased consulting fees related to evaluating the effects of the new revenue recognition rules and fees related to making the transition to a new independent registered certified public accounting firm.

 

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Bad debt expense

 

    Fiscal Year Ended
    Increase/   (rounded to $1,000)     Change  
Item Description   Decrease   09/30/18     09/30/17     Amount     %  
Bad debt expense   Increase   $ 733,000     $ 177,000     $ 555,000       313 %

 

The Company recorded an additional reserve for both notes receivable and accounts receivable during the year ended September 30, 2018 due to the slowdown and issues in collections for both types of receivables.

 

Liquidity and Capital Resources

 

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which accordingly assumes, among other things, the realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company had losses of $218,833 in the current year. The Company had incurred accumulated losses of $2,391,525 as of September 30, 2018. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. 

 

We had cash flows provided by operating activities of approximately $70,000 for the year ended September 30, 2018 compared to cash flows used in operating activities of approximately $50,000 for the year ended September 30, 2017. The increase in cash flows provided by operating activities for the year ended September 30, 2018 compared to the year ended September 30, 2017 relates primarily to the decrease in net loss.

 

We had cash flows used in investing activities of approximately $203,000 and $12,000 for the years ended September 30, 2018 and 2017, respectively. The increase in cash flows used in investing activities was primarily due to the acquisition of property and equipment during the year ended September 30, 2018.

 

In December 2017, the Company granted an aggregate 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 fair value of the warrants, valued using the Black Scholes method 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 quarter ended December 31, 2017.

 

Cash funds are used for ongoing operating expenses, the purchase of equipment, property improvement, and software development. During the fiscal year ended September 30, 2018, the Company purchased property and equipment totaling approximately $193,000, and no intangible property.

 

As of January 29, 2016, the Company temporarily suspended domestic franchise offer 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. The Company has mainly focused its marketing efforts on the Bricks for Kidz offering, with plans to bolster and strengthen that aspect of the business before pursuing significant marketing efforts for Sew Fun Studios.

 

The Company has 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

 

The Company is dependent upon both franchise sales and royalty fees to continue current business operations and liquidity.

 

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Contractual Obligations

 

The Company entered into a Business Lease with Village Square at Palencia in July 2014, to lease unit 114 located at 701 Market Street, St. Augustine, Florida. The contract period began July 1, 2014 and ended June 15, 2019, upon which time, the Company relocated all of its physical operations to Boise, Idaho and signed a month-to-month lease agreement. The monthly rent is $1,425.

 

The following table summarizes the Company’s contractual obligations at September 30, 2018:

 

Obligation   2019     Total  
Commercial Lease (Suite 114)   $ 12,113     $ 12,113  

 

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

 

Refer to Part III, Item 13 of this Form 10-K for disclosure regarding certain related party transactions.

 

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

 

Revenue is recognized on an accrual basis after services have been performed under contract terms and in accordance with regulatory requirements, the service price to the client is fixed or determinable, and collectibility is reasonably assured. Since these 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. The franchise fees are fully collectible and nonrefundable as of the date of the signing of the franchise agreement, but the franchise fees are not recognized as revenue until initial training has been completed and when substantially all of the services required by the franchise agreement have been fulfilled by the Company in accordance with ASC Topic 952-605 Revenue Recognition-Franchisor. Royalties are recognized in the period earned. Changes in franchise agreement terms and types of services provided can have an impact on the recording of revenue in a period.

 

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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, 2018 and 2017 are adequate, but actual write-offs could exceed the recorded allowance. During the years ended September 30, 2018 and 2017 the balance in the allowance for doubtful accounts was approximately $938,000 and $262,000, 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, 2018 and 2017 the balance in the allowance for doubtful notes receivable was approximately $91,000 and $33,000, respectively.

 

Impairment of Property, Plant and Equipment and Goodwill and Other Intangible Assets

 

Goodwill and intangible assets with indefinite lives are not subject to amortization and are tested for impairment annually and more frequently if events or changes in circumstances indicate it is more likely than not that the asset is impaired (ASC 360-30).

 

Property, Plant and Equipment and intangible assets with a finite useful live are depreciated (amortized) and reviewed for impairment when indicators of impairment are present in accordance with ASC 360-10.

 

The Company recorded an impairment loss of $23,300 for intangible assets relating to SF, LLC in the current year. The Company abandoned the revenue stream for SF for which the intangible assets were intended to provide future economic value and therefore determined that the asset was fully impaired as of September 30, 2018.

 

Income Taxes

 

The net deferred tax assets primarily relate to temporary differences in U.S. federal and state jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider future taxable income in the various jurisdictions as well as carryforward periods and restrictions on usage. The estimation of future taxable income in these jurisdictions and our resulting ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to feasibility of certain tax planning strategies. Thus, recorded valuation allowances may be subject to material future changes. As a matter of course, we may be audited by federal, state and foreign tax authorities. We recognize the benefit of positions taken or expected to be taken in our tax returns in our Income Tax Provision when it is more likely than not that the position would be sustained upon examination by these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. At September 30, 2018 we had no unrecognized tax benefits. We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures.

 

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Share-based compensation

 

The Company has a share-based compensation plan which authorizes the granting of various equity-based incentives including stock options to employees and nonemployee directors. The expense for these equity-based incentives is based on their fair value at date of grant and generally amortized over their vesting period. The fair value of each stock option granted is estimated on the date of grant using a closed-form pricing model. The pricing model requires assumptions, which impact the assumed fair value, including the expected life of the stock option, the risk-free interest rate, expected volatility of the Company’s stock over the expected life and the expected dividend yield. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future years.

 

Litigation accruals

 

In the ordinary course of business, the Company is subject to proceedings, lawsuits and other claims primarily related to competitors, customers, employees, franchisees, government agencies, intellectual property, shareholders and suppliers. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company does not believe that any such matter currently being reviewed will have a material adverse effect on its financial condition or results of operations.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue with Contracts from Customers (Topic 606).” ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016-08 provides specific guidance to determine whether an entity is providing a specified good or service itself or is arranging for the good or service to be provided by another party. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” ASU 2016-10 provides clarification on the subjects of identifying performance obligations and licensing implementation guidance.

 

The requirements for these standards relating to Topic 606 will be effective for interim and annual periods beginning after December 15, 2017, which means the Company must adopt this standard effective October 1, 2018 for our fiscal year ending September 30, 2019. Management does not expect the new revenue recognition standard to materially impact the recognition of continuing royalty fees from franchisees. They do, however, expect the adoption of Topic 606 to impact the accounting for initial franchise fees. Currently, the Company recognizes revenue from initial franchise fees in a single, up-front transaction, upon the completion of training of new franchisees, in the period in which all material obligations and initial services have been performed. Upon the adoption of Topic 606, we believe the Company will need to recognize the revenue related to initial franchise fees over the term of the related franchise agreement. This will result in less revenue in the short-term and more deferred revenue recognized over a period of time.

 

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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, will be required. The new standard will become effective for the Company beginning with the first quarter 2020 and requires a modified retrospective transition approach and includes a number of practical expedients. Early adoption of the standard is permitted. The Company is currently evaluating the impact the adoption of this accounting guidance will have on the consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective in the first quarter of the fiscal year ended September 30, 2019 and early adoption is permitted. Management determined that this will affect the presentation of consolidated statement of cash flows upon adoption in the quarter ended December 31, 2018.

 

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable

 

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

 

Effective September 14, 2018, the Audit Committee of the Board of Directors of Creative Learning Corporation (the “Company”) approved the engagement of Marcum LLP (“Marcum”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ending September 30, 2018, and dismissed Hancock Askew & Co., LLP (“Hancock”) as the Company’s independent registered public accounting firm. The change in the Company’s independent registered public accounting firm was made to reduce the fees payable by the Company in connection with the audit of its financial statements for the fiscal year ending September 30, 2018.

Hancock’s audit reports on the Company’s consolidated financial statements as of and for the fiscal years ended September 30, 2017 and September 30, 2016 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended September 30, 2017 and September 30, 2016 , and the subsequent interim periods through September 14, 2018, there were (i) no disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and Hancock on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Hancock’s satisfaction, would have caused Hancock to make reference thereto in their reports on the financial statements for such years, and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) of Regulation S-K.

During the fiscal years ended September 30, 2017 and September 30, 2016 , and the subsequent interim periods through September 14, 2018, neither the Company nor anyone acting on its behalf has consulted with Marcum regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements or the effectiveness of internal control over financial reporting, and neither a written report or oral advice was provided to the Company that Marcum concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or (iii) any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.

 

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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 as of September 30, 2018, in light of the material weaknesses described below, our disclosure controls and procedures were not effective as of September 30, 2018. 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, 2018, 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, 2018 due to the following identified material weaknesses:

 

● Did not have sufficient segregation of duties or compensating controls in the accounting and finance function due to limited personnel.

 

● Did not maintain 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.

 

● Did not have appropriate personnel with experience and training to prepare the income tax provision.

 

● Lacked documentation to support occurrences of monitoring processes and approval procedures, in order to demonstrate that internal controls were operating effectively.

 

Management believes that despite our material weaknesses, our consolidated financial statements for the year ended September 30, 2018 are fairly stated, in all material respects, in accordance with GAAP.

 

Changes In Internal Control Over Financial Reporting

 

During the fourth quarter of 2018, 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 CEO and CFO, 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.

 

Item 9B. Other Information

 

None.

 

28

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance Directors and Executive Officers

 

Our directors and executive officers and their ages at March 1, 2019, are listed in the following table:

 

Name   Age   Title
Blake Furlow   37   Chairman of the Board and Chief Executive Officer
Bart Mitchell   46   Chief Operating Officer and Chief Financial Officer
Gary Herman   54   Director
JoyAnn Kenny-Charlton   41   Director

 

Blake Furlow became de facto Chairman of the Board of the Company in July 2017, formally effectuated in August of 2017. He was appointed Chief Executive Officer on August 15, 2018. Mr. Furlow, in February 2015, co-founded Boise Escape LLC (“Boise Escape”). Boise Escape is a private company that offers an escape the room game, which is a real-life team-based puzzle game. Since founding Boise Escape, Mr. Furlow has served as President. In addition, Mr. Furlow has invested privately in commercial real estate and development since March 2009. In 2006, Mr. Furlow founded an internet lending company, Pay Day Loan Rescue, Inc., which offered borrowers relief from short-term loans and provided consumer finance education, where he worked until July 2013. Mr. Furlow’s history of building entrepreneurial initiatives and operating small businesses successfully with a focus on cash flow and operations will be of immense value to the Company.

 

Bart Mitchell became a de facto director of the Company in July 2017, formally effectuated in August of 2017, and was appointed to be the Chief Operating Officer/Chief Financial Officer on October 15, 2018. Mr. Mitchell, is a founding member and partner of Greenbrier Academy for Girls (“GBA”), a residential therapeutic boarding school. He served as the Chief Operating Officer and Chief Financial Officer from June 2007 through August 2016, successfully navigating the company through startup and establishing it as a thought leader and premier academy in its highly competitive niche. Prior to his time at GBA, Mr. Mitchell was an officer and managing member of TAS Development, LLC from 2005 until 2007. From 2002 until 2005, he was department director for the Alldredge Academy. Previously, Mr. Mitchell served as a manager for Xlear Inc., from 2000 until 2002. He also is the owner and creator of Escape Game Coeur d’Alene, which provides live interactive adventure games focused on cooperative teamwork to solve puzzles and accomplish tasks to escape a themed game space. Mr. Mitchell holds degrees in philosophy from Brigham Young University and English from Dixie State University. Mr. Mitchell’s experience with both the financial and operations of GBA, including working with a curriculum team to provide flexible, engaging academics, give him unique and valuable insights that will prove to be an asset as a board member for the Company.

 

Gary Herman became a de facto director of the Company in July 2017, formally effectuated in August of 2017. Mr. Herman has many years of investment experience with a focus on undervalued public companies. Since 2002, Mr. Herman has been a managing member of Galloway Capital Management, LLC, which, through its fund, Strategic Turnaround Equity Partners, LP (Cayman) has focused on investments primarily in undervalued securities. From January 2011 to August 2013, Mr. Herman was a managing member of Abacoa Capital Management, LLC, which, through its fund, Abacoa Capital Master Fund, Ltd. focused on a Global-Macro investment strategy. Since 2005, Mr. Herman has been a registered representative with Arcadia Securities LLC, a FINRA-registered broker-dealer based in New York. From 1997 to 2002, he was an investment banker with Burnham Securities, Inc. From 1993 to 1997, he was a managing partner of Kingshill Group, Inc., a merchant banking and financial firm with offices in New York and Tokyo. Mr. Herman also has franchising experience, having served on the boards of several franchised concepts, including Arthur Treacher’s Fish & Chips, Wall Street Deli Systems, Inc., Shells Seafood Restaurants, Inc., and Miami Subs Corporation where he also served as President from 2007 to 2009. Mr. Herman has a B.S. from the State University of New York at Albany with a major in Political Science and minors in Business and Music. Mr. Herman has served on the boards of public and private companies for many years, including Tumbleweed Holdings, Inc., since 2001. His experience has included board membership, corporate officer, advisory, capital raising and restructuring roles. We believe that these experiences make Mr. Herman well-qualified to serve as a member of the Board.

 

29

 

 

JoyAnn Kenny-Charlton has served as a director of the Company since July 2015. Ms. Kenny-Charlton is an attorney with Marks & Klein LLP and the owner of Kenny Law 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 was named a “Legal Eagle” (2013, 2014 and 2015) 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.

 

Board Structure

 

The Company’s Board has concluded that each of the following directors is independent, as defined in Section 803 of the listing standards of the NYSE MKT: Gary Herman and JoyAnn Kenny-Charlton.

 

In December 2015, the Company established an Executive Committee which is currently composed of the following board members: Blake Furlow, Gary Herman and JoyAnn Kenny-Charlton.

 

The Board has established an Audit Committee which is currently composed of the following board member: Gary Herman.

 

In December 2015, the Company established a Compensation Committee which is currently composed of the following board members: JoyAnn Kenny-Charlton, Bart Mitchell and Gary Herman.

 

The following Company directors are considered “financial expert” as that term is defined in the regulations of the SEC: Gary Herman.

 

Director Nominees

 

Our Board is responsible for overseeing the selection of persons to be nominated to serve on our Board. 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.

 

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.

 

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.

 

30

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16 of the Exchange Act requires our directors and executive officers and persons who own more than 10% of our outstanding common stock to file reports of ownership and changes in ownership of our common stock. Based solely upon a review of the copies of such reports furnished to the Company, and on written representations from the reporting persons, the Company believes that all required reports were filed on time with the SEC during fiscal 2018. However, Mr. Furlow and Mr. Herman filed Forms 4 in March 2018 and March 2019, respectively, that should have been filed within two business days of receiving certain shares of Common Stock on December 31, 2017 and December 29, 2017, respectively, in conjunction with the issuance of standby letters of credit.

 

Item 11. Executive Compensation

 

The following identifies the elements of compensation for fiscal years 2018 and 2017 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 2018, (ii) our two most highly compensated executive officers other than the principal executive officer who were serving as executive officers at September 30, 2018 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, 2018.

 

Based on our compensation for the fiscal year ended September 30, 2018, Blake Furlow and Christian Miller constitute our only “named executive officers” pursuant to Item 402 of Regulation S-K.

 

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.

 

Summary Compensation Table

 

The following table shows the compensation paid or accrued to the Company’s named executive officers during the fiscal years ended September 30, 2018 and 2017.

 

              All Other        
  Fiscal   Salary     Compensation        
Name and Principal Position   Year   (1)     (2)     Total  
Blake Furlow(3)   2018   $ 20,942     $ -     $ 20,942  
CEO   2017   $ -     $ -     $ -  
                             
Christian Miller (4)   2018   $ 105,479     $ 30,000     $ 135,479  
CFO and COO   2017   $ 110,000     $ 17,603     $ 127,603  

 

1) The dollar value of base salary (cash and non-cash) earned.
2) Includes option grants made during the year ended September 30, 2017 to Christian Miller and severance pay to Christian Miller during the year ended September 30, 2018.
3) Blake Furlow became the CEO on August 15, 2018.
4) Christian Miller became the CFO in July of 2016 and COO in August of 2017 and resigned from both positions on September 15, 2018.

 

31

 

 

Outstanding Equity Awards At Fiscal Year-End

 

The following table shows information regarding outstanding equity awards (consisting of option awards) held by each of the Company’s named executive officers as of September 30, 2018.

 

    Option Awards
Name   Number of Securities Underlying Unexercised Options (#)
Exercisable 		    Number of Securities Underlying Unexercised Options (#)
Unexercisable 		    Option Exercise Price ($)     Option Expiration Date
Christian Miller     118,793       -0-     $ 0.1840     09/30/22

 

Director Compensation

 

None.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table shows, as of March 31, 2019, information with respect to those persons owning beneficially 5% or more of the Company’s common stock and the number and percentage of outstanding shares owned by each Director and named executive officer and by all current executive officers and directors as a group.

 

Applicable percentage ownership is based on 12,075,875 shares of common stock outstanding at March 31, 2019. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to options, restricted stock units (RSUs) or other convertible securities held by that person or entity that are currently exercisable or releasable or that will become exercisable or releasable within 60 days of March 31, 2019. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, each owner has sole voting and investment powers over their shares of common stock, and the address of each owner listed is c/o the Company, 701 Market Street, Suite 113, St. Augustine, Florida 32095.

 

          Percent of  
    Shares     Outstanding  
Name   Owned     Shares  
Blake Furlow     2,435,558 (1)     20.2 %
Michele Cote     1,401,700 (2)     11.6 %
Rod Whiton     498,501       4.1 %
Gary Herman     -       0.0 %
Christian Miller     -       0.0 %
JoyAnn Kenny-Charlton     -       0.0 %
All officers and directors as a group     4,335,759       35.9 %

 

* Includes shares owned by directors elected pursuant to the written consent described herein.
(1) Includes 51,029 shares owned by Mr. Furlow’s wife, which he may be deemed to beneficially own.
(2) Shares are held of record by Cote Trading Company, LLC, a limited liability company controlled by Ms. Cote.

 

32

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

During the years ended September 30, 2018 and 2017, the Company incurred the following related party fees:

 

In December 2017, the Company granted an aggregate 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 fair value of the warrants on the date of grant were $2,000, and the shares vested immediately. The Company expensed $2,000 in connection with the grant during the quarter ended December 31, 2017.

 

Item 14. Principal Accountant Fees and Services.

 

In July 2016, Hancock, Askew & Co., LLP was engaged as the Company’s independent registered public accountants. Such accounting firm was the Company’s principal accounting firm for the fiscal year ended September 30, 2017.

 

On September 14, 2018, Marcum LLP was engaged as the Company’s independent registered public accountants for the year ended September 30, 2018.

 

The following table shows the fees billed aggregate to the Company for the period shown:

 

        Fiscal Year End  
        September 30,  
Firm   Service   2018     2017  
Marcum, LLP   Audit & Tax Related Fees     94,000       -  
Hancock Askew & Co., LLP   Audit & Tax Related Fees     -       135,825  
        $ 94,000     $ 135,825  

 

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.

 

33

 

 

PART IV

 

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, 2018 and September 30, 2017;

 

● Consolidated Statements of Operations for the years ended September 30, 2018 and September 30, 2017;

 

● Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2018 and September 30, 2017.

 

● Consolidated Statements of Cash Flows for the years ended September 30, 2018 and September 30, 2017;

 

(3) Exhibits

 

The accompanying Index to Exhibits is incorporated herein by reference.

 

Item 16. 10-K Summary

 

None.

 

34

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders’ and Board of Directors of

Creative Learning Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Creative Learning Corporation (the “Company”) as of September 30, 2018, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year ended September 30, 2018, and the related notes (collectively referred to as 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, 2018, and the results of its operations and its cash flows for the year ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and is reliant on its ability to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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 audit. 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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.

 

Marcum llp

 

We have served as the Company’s auditor since 2018.

 

West Palm Beach, FL
September 4, 2019

 

F-1

 

 

Report of Independent Registered Certified Public Accounting Firm

 

Board of Directors and Stockholders

Creative Learning Corporation

 

We have audited the accompanying consolidated balance sheet of Creative Learning Corporation as of September 30, 2017, and the related consolidated statements of operations, stockholder’s equity, and cash flows for the year ended September 30, 2017. Creative Learning Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Creative Learning Corporation as of September 30, 2017, and the results of its operations and its cash flows for the year ended September 30, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Respectfully submitted,

                                                

 

 

Savannah, Georgia

December 29, 2017

 

F-2

 

  

CREATIVE LEARNING CORPORATION

Consolidated Balance Sheets

 

    September 30,
2018 		    September 30,
2017 		 
Assets            
Current Assets:            
Cash   $ 80,693     $ 213,950  
Restricted Cash (marketing fund)     22,505       118,337  
Accounts receivable, less allowance for doubtful accounts of approximately $938,000 and $262,000, respectively     194,835       356,830  
Prepaid expense     29,725       73,337  
Assets held for sale     43,178       52,737  
Notes receivables - current portion, less allowance for doubtful accounts of approximately $91,000 and $33,000, respectively     11,955       2,730  
Total Current Assets     382,891       817,921  
                 
Notes receivables - net of current portion     3,045       59,150  
Property and equipment, net of accumulated depreciation of approximately $273,000 and $232,000, respectively     357,930       207,537  
Intangible assets     -       23,300  
Deposits     1,425       15,053  
Total Assets   $ 745,291     $ 1,122,781  
                 
Liabilities and Stockholders’ Equity                
Current Liabilities:                
Accounts payable   $ 161,011     $ 148,021  
Accrued liabilities     14,605       153,677  
Accrued marketing fund     97,334       131,909  
Total Current Liabilities     272,950       433,607  
                 
Commitments and Contingencies (Note 10)
               
                 
Stockholders’ Equity:                
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; 12,075,875 shares issued and 12,010,775 shares outstanding as of September 30, 2018 and 2017     1,207       1,207  
Additional paid-in capital     2,897,285       2,895,285  
Treasury Stock, 65,100 shares, at cost     (34,626 )     (34,626 )
Accumulated Deficit     (2,391,525 )     (2,172,692 )
Total Stockholders’ Equity     472,341       689,174  
                 
Total Liabilities and Stockholders’ Equity   $ 745,291     $ 1,122,781  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-3

 

 

CREATIVE LEARNING CORPORATION

Consolidated Statements of Operations

 

    September 30,
2018 		    September 30,
2017 		 
REVENUES            
Royalties fees   $ 2,207,442     $ 2,249,023  
Initial franchise fees     191,503       206,950  
Merchandise sales     17,781       60  
TOTAL REVENUES     2,416,726       2,456,033  
                 
COST OF GOODS SOLD     6,662       -  
GROSS PROFIT     2,410,064       2,456,033  
                 
OPERATING EXPENSES                
Salaries and payroll taxes, including $2,000 and $360,738 of stock-based compensation in 2018 and 2017     695,884       1,077,348  
Professional fees and legal settlements     598,237       1,316,838  
Bad debt expense     732,590       177,288  
Other general and administrative expenses     391,923       312,809  
Franchise consulting and commissions     50,699       161,776  
Franchise training and expenses     46,567       15,710  
Depreciation     51,607       57,175  
Advertising     30,323       21,027  
Impairment expense     23,200       -  
Office expense     4,114       8,514  
TOTAL OPERATING EXPENSES     2,625,144       3,148,485  
                 
OPERATING LOSS     (215,080 )     (692,452 )
                 
OTHER INCOME (EXPENSE)     (3,753 )     26,103  
                 
LOSS BEFORE INCOME TAXES     (218,833 )     (666,349 )
                 
PROVISION FOR INCOME TAXES     -       (364,653 )
                 
NET LOSS   $ (218,833 )   $ (1,031,002 )
                 
NET LOSS PER SHARE                
Basic and diluted     (0.02 )   $ (0.09 )
Basic and diluted weighted average number of common shares outstanding     12,010,775       12,007,736  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4

 

 

CREATIVE LEARNING CORPORATION

Consolidated Statement of Changes in Stockholders’ Equity

 

                            Additional           Total  
    Treasury Stock     Common Stock     Paid-in     Accumulated     Stockholder's  
    Shares     Value     Shares     Amount     Capital     Deficit     Equity  
                                           
Balance October 1, 2016     (65,100 )   $ (34,626 )     12,001,409     $ 1,200     $ 2,534,554     $ (1,141,690 )   $ 1,359,438  
Compensatory stock issuances     -       -       74,466       7       14,493       -       14,500  
Compensatory stock option issuances     -       -       -       -       346,238       -       (346,238 )
Net loss                                             (1,031,002 )     (1031,002 )
Balance September 30, 2017     (65,100 )     (34,626 )     12,075,875       1,207       2,895,285       (2,172,692 )     689,174  
Stock-based compensation     -       -       -       -       2,000       -       2,000  
Net loss     -       -       -       -       -       (218,833 )     (218,833 )
Balance September 30, 2018     (65,100 )   $ (34,626 )     12,075,875     $ 1,207     $ 2,897,285     $ (2,391,525 )   $ 472,341  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5

 

 

CREATIVE LEARNING CORPORATION

Consolidated Statements of Cash Flows

 

    For the Fiscal Years ended  
    September 30,  
    2018     2017  
Cash flows from operating activities:            
Net Loss   $ (218,833 )   $ (1,031,002 )
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:                
Depreciation     51,607       57,175  
Bad debt expense     732,590       177,288  
Deferred income taxes     -       343,444
Stock issued for compensation     -       14,500  
Stock options issued for compensation     -       50,312  
Stock options issued for directors fees     -       295,926  
Stock based compensation     2,000       -  
Impairment loss on intangible assets     23,300       78,604  
Changes in operating assets and liabilities:                
Restricted cash     95,832       44,110  
Accounts receivable     (513,107 )     (285,604 )
Prepaid expenses     72,420       46,663  
Deposits     13,628       (13,628 )
Accounts payable     (15,818 )     (23,807 )
Accrued liabilities     (139,072 )     (208,978 )
Accrued marketing fund     (34,575 )     (15,318 )
Income tax receivable     -       424,938  
Customer deposits     -       (5,000 )
Net cash provided by (used in) operating activities     69,972     (50,377 )
                 
Cash flows from investing activities:                
Acquisition of property and equipment     (192,621 )     (19,349 )
(Issuance)/Collection of Notes receivable     (10,608 )     6,991  
Net cash used in investing activities     (203,229 )     (12,358 )
                 
Net change in cash     (133,257 )     (62,735 )
Cash, beginning of year     213,950       276,685  
Cash, end of year   $ 80,693     $ 213,950  
Noncash financing activity:                
Financed Insurance   $ 28,808     $ -  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6

 

 

CREATIVE LEARNING CORPORATION

Notes to Consolidated Financial Statements

September 30, 2018 and 2017

 

(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.

 

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”), and SF LLC (“Sew Fun Studios”).

 

The organizational documents for BFK Development Company LLC and SF LLC do not specify a termination date. Each of the above listed LLC’s has a single member, controlled 100% by CLC.

 

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 own subsidiaries BFK, BFKD, 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 as 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.

 

Fiscal year

 

The Company operates on a September 30 fiscal year-end.

 

F-7

 

 

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. We had no cash equivalents at September 30, 2018 and 2017.

 

The Company had restricted cash of approximately $23,000 and $118,000, respectively at fiscal years ended September 30, 2018 and 2017, associated with marketing funds collected from the franchisees. 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).

 

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.

 

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, 2018 and 2017 are adequate, but actual write-offs could exceed the recorded allowance. During the years ended September 30, 2018 and 2017 the balance in the allowance for doubtful accounts was approximately $938,000 and $262,000, 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, 2018 and 2017 the balance in the allowance for doubtful notes receivable was approximately $91,000 and $33,000, respectively.

  

Long-Lived Assets

 

The Company’s long-lived assets consist of property and equipment, and intangible assets. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.  Impairment evaluations involve management’s estimates of asset useful lives and future cash flows.  Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions.  Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.  

 

F-8

 

 

During fiscal year 2018, the Company recognized an Impairment Loss on long-lived assets relating to concepts and trademarks for SF LLC. Impairment is included in operating expenses in the consolidated statement of operations. See Note 5 for more information.

 

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-9

 

 

Revenue Recognition

 

Revenue is recognized on an accrual basis after services have been performed under contract terms and in accordance with regulatory requirements, the service price to the client is fixed or determinable, and collectability is reasonably assured.

 

Since 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. The franchise fees are fully collectible and nonrefundable as of the date of the signing of the franchise agreement, but the franchise fees are not recognized as revenue until initial training has been completed and when substantially all of the services required by the franchise agreement have been fulfilled by the Company in accordance with ASC Topic 952-605 Revenue Recognition-Franchisor. Royalties are recognized as earned on a monthly basis.

 

At September 30, 2018 and 2017 the Company had no unearned revenue for franchise fees collected but not yet earned per the revenue recognition policy.

 

Advertising Costs

 

Advertising costs are expensed as incurred. The Company incurred advertising costs for the years ended September 30, 2018 and 2017 of approximately $30,000 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.

 

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, 2018 and 2017, respectively, and has not recognized interest and/or penalties during the years ended September 30, 2018 and 2017, 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 2015 and forward by the U.S. Internal Revenue Service, and the years 2014 and forward for various states.

 

F-10

 

 

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. However, because of the Company’s net losses, the effects of stock options and warrants would be anti-dilutive and, accordingly, are excluded from the computation of earnings per share. The number of such shares excluded from the computations of diluted loss per share totaled 2,157,709 at September 30, 2018 and 2,143,423 at September 30, 2017.

 

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 May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The Company adopted this standard effective October 1, 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Management has not yet completed the assessment of the impact the adoption of the standard is expected to have on the financial statements. They do, however, expect the adoption of Topic 606 to impact the accounting for initial franchise fees. Currently, the Company recognizes revenue from initial franchise fees in a single, up-front transaction, upon the completion of training of new franchisees, in the period in which all material obligations and initial services have been performed. Upon the adoption of Topic 606, we believe the Company will need to recognize the revenue related to initial franchise fees over the term of the related franchise agreement. This will result in less revenue in the short-term and more deferred revenue recognized over a period of time.

 

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, will be required. The new standard will become effective for the Company beginning with the first quarter 2020 and requires a modified retrospective transition approach and includes a number of practical expedients. Early adoption of the standard is permitted. The Company is currently evaluating the impacts the adoption of this accounting guidance will have on the consolidated financial statements.

 

F-11

 

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective in the first quarter of the fiscal year ended September 30, 2019 and early adoption is permitted. Management determined that this will affect the presentation of consolidated statement of cash flows upon adoption in the quarter ended December 31, 2018.

 

In June 2016, the FASB issued ASU No. 2016-13—Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements

 

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.

  

(2) Going Concern

 

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which accordingly assumes, among other things, the realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company had losses of $218,833 in the current year. The Company had incurred accumulated losses of $2,391,525 as of September 30, 2018. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Based on the Company’s cash balance at September 30, 2018 and projected cash needs for the next 12 months from the issuance date of these financial statements, management believes that the Company will need to increase revenues, reduce costs and/or pursue other transactions to be able to continue to fund operating and capital requirements. The Company plans to implement cost cutting measures, including reducing personnel, reducing legal and professional expenses, moving the company’s central location to Boise, ID, selling Company owned real estate, and incorporating technology where economic opportunity presents. The Company plans to expand its offerings to allow current franchisees to operate in unoccupied territories for a yearly fee plus a monthly percentage of revenue (see Note 10).  However, should the current legal issues or unforeseen legal actions prevail against the Company, or a drastic downturn in the economy become actual, the Company expects that profitability would be affected. At such time, the Company would need to secure loans, lines of credit or other means to raise operating capital. The Company cannot be sure that it will be able to obtain any such additional funds by any of the foregoing or other means, and any such funds it may obtain may not be sufficient. If the Company is unable to obtain sufficient funds, it may be unable to continue as a going concern.

 

(3) Related Party Transactions

 

In December 2017, the Company granted 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 were valued using the Black Scholes method. The fair value of the warrants on the date of grant were $2,000, and the shares vested immediately. The Company expensed $2,000 in connection with the grant during the quarter ended December 31, 2017.

 

F-12

 

 

(4) Property and Equipment

 

Property and equipment consisted of the following:

 

    September 30,  
Description   2018   2017  
Depreciable Property and Equipment:              
Equipment   $ 74,456   $ 66,969  
Furniture and Fixtures     83,427     83,427  
Property and Improvements     180,878     180,878  
Software     114,884     98,307  
Total Depreciable Property and Equipment     453,645     429,581  
Accumulated Depreciation     (282,541 )   (240,493 )
Total Net Depreciable Property and Equipment     171,104     189,088  
Non-depreciable Property and Equipment:              
Work in progress     186,826     18,269  
Total Net Property and Equipment   $ 357,930   $ 207,357  

  

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 and $52,737 related to the net book value of this asset has been classified as Assets held for sale in the Consolidated Balance Sheet at September 30, 2018 and 2017 respectively.

 

Depreciation expense totaled approximately $52,000 and $57,000, respectively, for the years ended September 30, 2018 and 2017.

  

(5) Intangible Assets

 

Intangible Assets consist of purchased franchise rights and trademarks. The Intangible assets consists of Sew Fun Trademarks, Business Concepts and Curriculum which was purchased by the Company.

 

During the fiscal year 2017, the Company determined that certain long-lived assets, related to repurchases of BFK territories during fiscal year 2013 and 2014, were over-valued. The Company determined that these territories and their associated fixed assets had no fair value outside of their unimproved territory value compared to other unsold territories. The impairment loss of $78,604 related to these assets is included in the other general and administrative expenses line on the Consolidated Statements of Operations for the year ended September 30, 2017.

 

The Company abandoned the revenue stream for SF for which the intangible assets were intended to provide future economic value and therefore determined that the asset was fully impaired as of September 30, 2018. $23,300 was recorded as an impairment loss in the other general and administrative expenses line on the Consolidated Statements of Operations for the year ended September 30, 2018.

  

(6) Notes and Other Receivables

 

At September 30, 2018 and 2017, respectively, the Company held certain notes receivable totaling approximately $106,000 and $95,000 respectively for extended payment terms of franchise fees. The Company had an allowance on notes receivable of $91,000 and $33,000 as of September 30, 2018 and 2017, respectively. The net notes receivable was approximately $15,000 and $62,000 and was included in the consolidated balance sheet as of September 30, 2018 and 2017 respectively. The notes were generally non-interest-bearing notes with monthly payments, payable within one to two years.

 

    2019     2020     Total  
Payment schedules for Notes Receivable   $ 11,955     $ 94,045     $ 106,000  

 

F-13

 

 

 (7) 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 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.

 

At September 30, 2018 and 2017, the accrued marketing fund liability balances were approximately $97,000 and $132,000 respectively.

 

(8) Accrued Liabilities

 

The Company had accrued liabilities at September 30, 2018, and September 30, 2017 as follows:

 

Accrued Liabilities    September 30,
2018 		    September 30,
2017 		 
Accrued legal Fees   $ -     $ 77,719  
Accrued Legal Settlements     -       32,143  
Accrued Exit Agreement     -       9,739  
Accrued Compensation and payroll taxes     14,605       17,950  
Accrued Other     -       16,126  
  $ 14,605     $ 153,677  

 

(9) Stock-Based Compensation

 

In December 2017, the Company granted an aggregate of 14,286 warrants to two Directors of the Company. (See Note 3).

 

The Company utilized the Black-Scholes valuation model for estimating fair value of the warrants. Each grant was evaluated based upon assumptions at the time of the grant. The assumptions used in our calculations are no dividend yield, expected volatility of approximately 247%, a risk-free interest rate of 1.76%, 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.

 

On May 14, 2017, the Company granted options consistent with its corporate by-laws to purchase shares of the Company’s common stock to each of the members of the Company’s then Board, as follows: Charles Grant – 900,000 shares, Joseph Marucci – 324,000 shares, Michael Gorin – 324,000 shares and JoyAnn Kenny, 216,000 shares. Each of the options has an exercise price of $0.30 per share, and is exercisable in full at any time during the five-year period commencing on the date of grant. The option grants were approved by the Board based upon an investigation by an independent compensation consultant, who provided analysis and compensation recommendations to the Board. Among other things, the report concluded that the directors have: (i) served entirely without compensation (other than $4,500 paid to Mr. Marucci in or prior to July 2015) – Messrs. Grant and Marucci since March 2015 and Mr. Gorin and Ms. Kenny since July 2015; (ii) devoted more time and effort than what is to be expected or considered normal (especially the audit committee); (iii) been confronted by extenuating circumstances regarding the Company’s affairs that required substantial additional effort. Finally, the analysis indicated that Board Chair, Charles Grant, had expended a particularly large amount of effort, spending considerably more time performing board services than the other board members.

 

F-14

 

 

On May 13, 2017, pursuant to the employment agreement of Karla Kretsch, the Company’s then President, the Company issued 8,000 shares of the Company’s common stock, and granted options to purchase 28,000 shares of the Company’s common stock at an exercise price of $0.25 per share, exercisable in full at any time during the five-year period commencing on the date of the grant. The shares and options were issued pursuant to the terms of Ms. Kretsch’s employment agreement with the Company, on account of Ms. Kretsch’s service to the Company for the quarter ended March 31, 2017. Based on the same employment agreement, for the quarter ending June 30, 2017, the Company issued 12,118 shares of the Company’s common stock, and granted options to purchase 42,414 shares of the Company’s common stock at an exercise price of $0.2063 per share, exercisable in full at any time during the five-year period commencing on the date of the grant.

 

On July 26, 2017, Karla Kretsch informed the Company of her intention to resign as President of the Company. Since Ms. Kretsch’s employment was terminated by Ms. Kretsch for “Good Reason” (as such term is defined in the Employment Agreement), Ms. Kretsch will be paid an amount equivalent to her base salary for a period of three months following the date of termination in equal amounts every two weeks, and will also be entitled to receive the Equity Awards due for the quarter in which termination occurred, as well as the immediately following three quarters, paid as scheduled at quarter-end. Therefore, for the quarter ending September 30, 2017, the Company recorded a total of approximately $34,000 in stock-based compensation expense for the fair value of equity awards according to the Employment Agreement. The Employment Agreement requires the grant of stock options to purchase 190,216 shares of the Company’s common stock at an exercise price of $0.1840 per share, as well as stock grants for 54,348 shares.

 

On October 26, 2017, the Board granted options to purchase 118,793 shares of the Company’s common stock at an exercise price of $0.1840 per share, exercisable in full at any time during the five-year period commencing on the date of the grant to Christian Miller per his employment agreement from July of 2016. These options were retroactively issued on September 30, 2017 and are included in salaries and payroll taxes in the consolidated statement of operations as of September 30, 2017.

 

The Company utilizes the Black-Scholes valuation model for estimating fair value of stock compensation for options awarded to officers and members of the Board. Each grant is evaluated based upon assumptions at the time of the grant. The assumptions used in our calculations are no dividend yield, expected volatility between 129.03% and 134.69%, risk-free interest rate of 1.85% to 1.89%, and expected term of 2.5 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 following are activity of options:

 

    Number of Shares     Average Exercise Price     Expiration Date   Average Remaining Life     Weighted Average Grant Date Fair Value  
Granted May 13, 2017     1,792,000     $ 0.30     05/13/22   44.5 Months       0.17  
Granted June 30, 2017     42,414     $ 0.21     06/30/22   45 Months       0.15  
Granted September 30, 2017     309,009     $ 0.18     09/30/22   48 Months       0.13  
Vested and Exercisable at September 30, 2018     2,143,423     $ 0.28                 0.16  

  

No options were granted or forfeited during the year ended September 30, 2018. The aggregate intrinsic value of the options as of September 30, 2018 was $0.

 

F-15

 

 

(10) Commitments and Contingencies

 

Lease Commitments

 

The following table summarizes the Company’s contractual lease obligations at September 30, 2018:

 

Obligation   2019   Total  
Commercial Lease (Suite 114)   $ 12,113   $ 12,113  

 

The lease for Suite 114 expires in June 2019 and will not be renewed. Space will be leased on a month-to-month basis in Boise, Idaho subsequent to the expiration of the above lease.

 

Rent expense was approximately $18,000 and $16,000, respectively, for the years ended September 30, 2018 and 2017.

 

Litigation

 

From time to time, the Company has been and may become involved in legal proceedings arising in the ordinary course of its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

 

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. The Company denies the allegation and is actively litigating this matter.

 

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”) alleged 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. This case is being actively litigated by the Company.

 

On October 27, 2016, Brian Pappas filed a motion to amend the complaint 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 does amend his complaint, the Company will vigorously defend the proposed claim.

 

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. The same Plaintiffs also initiated arbitration 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.

 

On May 9, 2017, franchisee, Back and 4th, LLC, along with its owner, Kristena Bins-Turner, initiated arbitration against the Company for breach of contract, alleging that they did not receive adequate value for royalty payments made under the franchise agreement, for fraud, alleging material misrepresentations and omissions prior to entry into the franchise agreements, and for misrepresentation violations of Florida Statute 817.416. (American Arbitration Association, Case. No. 01-16-004-3745). Franchisee and its owner seek an unspecified amount of damages. The Company contested the allegations and its liability for any damages at an evidentiary hearing held December 5-7, 2017. This matter has been settled for $45,500 and included in other general and administrative expenses in the consolidated statement of operations the year ended September 30, 2018.

 

F-16

 

 

On August 21, 2017, the SEC filed a Civil Complaint against the Company and certain former executive officers and directors in the United States District Court for the Middle District of Florida, Jacksonville Division, as Civil Action No. 3:17-cv-00954-TJC-JRK. The Civil Complaint was in regards to alleged violations of federal securities law occurring between 2011 and 2015. On August 22, 2017, the SEC also filed with the court the Company’s formal Consent to a full resolution of all allegations pertaining to the Company. Pursuant to the Consent, without admitting or denying the allegations, the Company agreed to the entry of a final judgment that permanently enjoins it from violating the sections of the federal securities laws listed in the Civil Complaint. On September 20, 2017, the United States District Court for the Middle District of Florida, Jacksonville Division issued the final judgment order as to the Company in the Civil Action No. 3:17-cv-00954-TJC-JRK. The entering of the final judgment order has resolved all allegations pertaining to the Company. The Company was not assessed any monetary penalties. As stated in the above, this matter is resolved and closed.

 

On September 21, 2017, the Company filed a notice of voluntary dismissal without prejudice in the United States District Court for the Middle District of Florida, Jacksonville Division, in its lawsuit against Blake and Anik Furlow relating to their conduct in the shareholder consent the complaint on May 15, 2017, and after consideration, decided it was not in the best interest of the Company to proceed with the litigation. The action is closed. The dismissal is public record and is case # 3:17-cv-00552.

 

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). 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. The Company is vigorously contesting the allegations and its liability for any damages.

  

(11) Income Taxes

 

The components of the deferred tax assets at September 30, 2018 and September 30, 2017 were as follows:

 

    2018     2017  
Deferred tax assets:            
Allowance for bad debt   $ 159,907     $ 104,056  
Charitable contributions     127       176  
Stock-based compensation     87,675       121,919  
Foreign Tax Credit     96,491       66,085  
Net operating loss     304,953       466,998  
Total gross deferred tax asset     649,153       759,234  
Deferred tax liabilities:                
Depreciation timing difference     (10,444 )     (11,445 )
Total deferred tax liability     (10,444 )     (11,445 )
Gross net deferred tax asset     638,709       747,789  
Less: Valuation allowances     (638,709 )     (747,789 )
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.

 

F-17

 

 

The components of the provisions for income taxes for the fiscal years ended September 30, 2018 and 2017 are as follows:

 

    2018     2017  
Current:            
Federal   $ -     $ (53,587 )
State     -       (10,497 )
Total     -       64,084  
Deferred:              
Additional deferred tax related to book tax differences     109,081       (56,410 )
Valuation allowance     (109,081 )     485,147  
Total Tax Provision   $ -     $ 364,653  

  

A reconciliation of the provisions for income taxes for the fiscal years ended September 2018 and 2017 as compared to statutory rates is as follows:

 

    2018     2017  
    Amount     %     Amount     %  
Provision at statutory rates   $ (53,125 )     24.28 %   $ (226,559 )     34.00 %
State income tax, net of federal benefit     (7,477 )     3.42 %     (24,188 )     3.63 %
Penalties     -       0.00 %     18,815       -2.82 %
Meals & Entertainment     2,158       -0.99 %     1,040       -0.16 %
Stock-based compensation     -       0.00 %     130,289       -19.55 %
Tax credits     (23,024 )     10.52 %     -       0.00 %
Other tax differences     (10,754 )     4.91 %     (19,891 )     2.99 %
Change in rate     201,303       -91.99 %     -       0.00 %
Valuation Allowance on deferred tax assets     (109,081 )     49.85 %     485,147       -72.81 %
Total income tax provision   $ -       0 %   $ 364,653       -54.72 %

  

In December 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects the way we can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on our balance sheet. Given that current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the balance sheet. However, when we become profitable, we will receive a reduced benefit from such deferred tax assets. The effect of the legislation is a reduction in deferred tax assets and the corresponding valuation allowance of approximately $201,000, as of September 30, 2018.

 

F-18

 

 

(12) Subsequent Events

 

The Company evaluates subsequent events that occur after the balance sheet date through the financial statements were issued. The following are subsequent events requiring disclosure:

 

On November 14, 2018, the Company completed the sale of its condominium held for sale for proceeds of approximately $86,000 and recorded a gain of approximately $43,000, which represented the excess of the proceeds over the carrying value on that date.

 

On March 27, 2019, the Company issued 13,265 shares of common stock to the 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 June 24, 2019, the Company entered into a business venture with BPL Enterprises for Brickz4Schoolz (BPL) to form Bricks4Schoolz, LLC, a company that will deliver curriculum to Elementary and Middle School students which serves to help further children’s academic performance and reduce anxiety in Mathematics and Sciences. The Company will provide access to its curriculum, manuals and training materials. BPL will develop digital delivery systems, market and act as manager. The Company will receive twelve percent (12%) royalty from all gross sales generated by Bricks4Schoolz, LLC. The Company did not provide any capital contributions to the venture. 

 

On July 9, 2019 the Company completed the sale of a condominium conference space listed for sale subsequent to year end 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.

 

F-19

 

 

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
   
  By: /s/  Bart Mitchell
   

Bart Mitchell

Chief Financial Officer and

Chief Operations Officer

 

Date: September 4, 2019

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Blake Furlow and Bart Mitchell jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.

 

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/ Bart Mitchell   Chief Financial Officer and Chief Operations Officer   September 4, 2019
Bart Mitchell   (Principal Financial Officer)    
         
/s/ Blake Furlow    Chief Executive Officer, Chairman of the Board   September 4, 2019
Blake Furlow   (Principal Executive Officer)    
         
/s/ Gary Herman    Director   September 4, 2019
Gary Herman        
         
/s/ JoyAnn Kenny-Charlton    Director   September 4, 2019
JoyAnn Kenny-Charlton        

 

35

 

 

INDEX TO EXHIBITS

 

Exhibits   Description    
     
3.1.1   Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s registration statement on Form SB-2, File No. 333-145999).
     
3.1.2   Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010).
     
3.2  

Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s registration statement on Form SB-2, File No. 333-145999).

     
3.2.1  

Amendment to the Amended and Restated Bylaws (incorporated by reference to Appendix A of the Schedule 14C filed on August 18, 2017)

     
10.1   Agreement relating to the acquisition of BFK Franchise Company (incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K dated July 2, 2010).
     
10.2   Form of confirmation letter from certain Directors and Officers (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017).
     
21*   Subsidiaries of the Company.
     
31.1*   Rule 13a-14(a) Certification of Principal Executive Officer and Principal Financial Officer.
     
31.2*   Rule 13a-14(a) Certification of Principal Accounting Officer.
     
32.1**   Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
     
32.2**   Section 1350 Certification of Principal Accounting Officer
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

** Furnished herewith.

 

 

36

 

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