The accompanying notes are an integral part of the
condensed consolidated unaudited financial statements.
The accompanying notes are an integral part of the
condensed consolidated unaudited financial statements.
The accompanying notes are an integral part of the
condensed consolidated unaudited financial statements
The accompanying notes are an integral part of the
condensed consolidated unaudited financial statements.
Notes to Condensed Consolidated Unaudited Financial
Statements
(1) Nature of Organization, Operations and
Summary of Significant Accounting Policies:
Nature of Organization
Creative Learning Corporation (the
“Company”) operates wholly owned subsidiaries, BFK Franchise Co., LLC (“BFK”) and SF Franchise Company, LLC (“SF”),
under the trade names Bricks 4 Kidz® and Sew Fun Studios™ respectively, that offer children’s enrichment and education
franchises. As of March 31, 2021, BFK franchisees operated in 496 territories in 35 states and 40 countries.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial
information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required for complete financial statements. In the opinion of management, these consolidated financial statements contain
all normal recurring adjustments considered necessary for a fair presentation of the Company’s results for the interim periods that
have been included. The results for the three months and six months ended March 31, 2021 are not necessarily indicative of the results
to be expected for the full year. These statements should be read in conjunction with the Company’s audited consolidated financial
statements and management’s discussion and analysis included in the Company’s annual report on Form 10-K for the year ended
September 30, 2020.
Related Parties
The Company has been involved in
transactions with related parties. A party is considered to be related to the Company if the party directly or indirectly or through one
or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal
owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other
parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which
can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one
of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be
prevented from fully pursuing its own separate interests is also a related party.
Use of Estimates
The preparation of financial statements
in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions made by management
include allowance for doubtful accounts, the valuation allowance for deferred tax assets, depreciation of property and equipment, amortization
of intangible assets, recoverability of long-lived assets and fair market value of equity instruments. Actual results could differ from
those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Cash, Restricted Cash and Cash Equivalents
The Company had restricted cash
of approximately $14,000 and $20,000 at March 31, 2021 and September 30, 2020, respectively, associated with marketing funds collected
from the franchisees. Per the franchise agreements a marketing fund of 2% of franchisees gross cash receipts is collected and held to
be spent on the promotion of the brand. Any cash collected by the Company for marketing funds is held in a separate bank account and any
balance at period end is presented as “restricted cash” and “accrued marketing fund” or “marketing fund
receivable” on the balance sheet.
Accounts and Note Receivables
The Company reviews accounts and
notes receivable periodically for collectability, establishes an allowance for doubtful accounts, and records bad debt expense when deemed
necessary. The Company records an allowance for doubtful accounts and notes that is based on historical trends, customer knowledge, any
known disputes, and the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability.
Receivables and notes are written off against the allowance after all attempts to collect a receivable have failed. The Company believes
its allowance for doubtful accounts at March 31, 2021 and September 30, 2020 are adequate, but actual write-offs could exceed the recorded
allowance.
Property, Equipment and Depreciation
Property and equipment are stated
at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, which range
from three to forty years. Expenditures for additions and improvements are capitalized, while repairs and maintenance costs are expensed
as incurred. The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of are removed from the
accounts and any gain or loss is recorded in the year of disposal.
Fixed Assets
|
|
Useful Life
|
Equipment
|
|
5 years
|
Furniture and Fixtures
|
|
5 years
|
Property Improvements
|
|
15-40 years
|
Software
|
|
3 years
|
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.
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
Revenue Recognition
The Company generates almost all
of its revenue from contracts with customers. The Company’s franchise agreements enter the parties into a contractual agreement,
typically over a ten years term, and include performance obligations as follows: protected territory designation, access to proprietary
manuals and handbooks, initial training and on-going assistance, consulting, promotion of goodwill, administration of marketing fund,
marketing and promotion items, initial marketing program development assistance, company website access, Franchise Management Tool access,
lessons and model plans, project kits, Duplo bricks, frames stop motion animation software, and use of the franchisor’s intellectual
property (IP) (e.g., trade name – Bricks for Kidz). Upon entering into a franchise agreement, the Company charges an initial franchise
fee, which is fully collectible and nonrefundable as of the date of the signing of the franchise agreement. Further, because the Company’s
franchises are primarily a mobile concept and do not require finding locations or construction, the franchisees can begin operations as
soon as they complete training.
Per the terms of the franchise
agreements, the Company charges for royalty fees on a monthly basis, generally set at a fixed amount, but in some cases are based on a
percentage of franchisee’s monthly gross revenues. The Company also charges fees for a marketing fund, generally based on 2% of
franchisee’s monthly gross revenues, which is managed by the Company, to allocate towards national branding of the Company’s
concepts to benefit the franchisees. Lastly, the Company charges for technology fees on a monthly basis, generally at a fixed amount,
for the use of the company Franchise Management tool as well as company emails, etc.
Effective October 1, 2018 the Company
began recognizing revenue under ASC 606. The Company considers initial franchise fees to be a part of the license of symbolic intellectual
property (“IP”), therefore the performance obligation related to these fees is satisfied over time as the Company fulfills
its promise to grant the customer rights to use, and benefit from, the Company’s IP, as well as support and maintain the IP. The
initial franchise fee, then, is recorded as deferred revenue at inception and recognized on a straight-line basis over the contract term.
In accordance with ASC 606-10-55-65,
the Company has determined that the royalty fees, marketing fees, and technology fees are subject to a sales and usage-based royalties’
constraint on licenses of IP. Accordingly, these fees are recognized as revenue at the later of when the sales or usage occurs or the
related performance obligation is satisfied. Technology fees are recorded net of processing fees. Marketing fees are limited to the lesser
of marketing amounts earned or expensed; therefore, the Company will recognize amounts received in excess of amounts spent on the balance
sheet in the accrued marketing fund liability and will recognize amounts spent in excess of amounts received on the balance sheet in the
marketing fund receivable.
The Company collects transfer fees
when contracts are transferred between parties and accounts for the transfer as a contract modification under ASC 606. Because the transfer
does not increase the scope of the contract or promise any additional goods or services and there are no new distinct services that will
be provided after the transfer the Company considers the transfer fee part of the existing contract. Transfer fees, then, are recorded
as deferred revenue at inception and recognized on a straight-line basis over the remaining contract term.
When contracts are terminated due
to default, or in conjunction with an early termination agreement, the Company accounts for the early termination as a contract modification
under ASC 606. Because the termination eliminates any future performance obligations of the Company any deferred revenue associated with
the terminated contract is recognized into revenue at the time of termination, along with any early termination fees, in the initial franchise
fee line on the Company’s Statement of Operations.
The Company generates revenue from
sales of merchandise where the performance obligation is met, and therefore revenue recognized, upon the delivery of merchandise to the
customer.
Contract Liability – Deferred Revenue
In conjunction with the adoption
of ASC 606, effective October 1, 2018 the Company recorded deferred revenue as a contract liability for its initial franchise fees collected
and related to contracts with remaining performance obligations. During the six months ended March 31, 2021 the activity in the deferred
revenue account was as follows:
Balance, September 30, 2020
|
|
$
|
3,212,679
|
|
Initial franchise fees collected
|
|
|
956
|
|
Deferred revenue recognized into revenue
|
|
|
(739,108
|
)
|
Balance, March 31, 2021
|
|
|
2,474,527
|
|
Current portion
|
|
|
(781,915
|
)
|
Deferred revenue, net of current portion
|
|
$
|
1,692,612
|
|
Amounts expected to be recognized
into revenue related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2021 were as follows:
Twelve months ended March 31, 2022
|
|
$
|
781,915
|
|
Twelve months ended March 31, 2023
|
|
|
697,838
|
|
Twelve months ended March 31, 2024
|
|
|
516,370
|
|
Twelve months ended March 31, 2025
|
|
|
252,471
|
|
Twelve months ended March 31, 2026 and thereafter
|
|
|
225,933
|
|
Total
|
|
$
|
2,474,527
|
|
Contract Liability / Asset – Accrued Marketing
Fund / Marketing Fund Receivable
Per the terms of the franchise
agreements, the Company collects 2% of franchisee’s gross revenues for a marketing fund, managed by the Company, to allocate toward
national branding of the Company’s concepts to benefit the franchisees.
The marketing fund amounts owed
to the Company are accounted for as a liability on the balance sheet and the actual collections are deposited into a marketing fund bank
account, presented as restricted cash on the balance sheet. Expenses pertaining to the marketing fund activities are paid from the marketing
fund and reduce the liability account. Upon adoption of FASB 606 on October 1, 2018, the Company presents these marketing fund revenues
and expenses on a gross basis on its statement of operations. Any unused funds at the end of the period are recorded as accrued marketing
fees or any funds used in excess of funds collected are recorded as a marketing fund receivable. The Company expects to collect this advance
in future periods from the 2% fees collected on future franchisee gross revenues. The activity in the accrued marketing fund liability
account for the six months ended March 31, 2021 was as follows:
Marketing fund liability (receivable), September 30, 2020
|
|
$
|
—
|
|
Marketing fund billings recognized into income
|
|
|
—
|
|
Marketing funds recognized into expense
|
|
|
—
|
|
Marketing funds advanced by the Company
|
|
|
(2,557
|
)
|
Marketing fund liability (receivable), March 31, 2021
|
|
$
|
(2,557
|
)
|
Contract Asset – Prepaid Commission Expense
In accordance with ASC 606 the
costs related to obtaining a contract are to be capitalized as long as the costs are recoverable and incremental. Effective October 1,
2018, the date the Company adopted ASC 606, it capitalized the value of sales commissions as a contract asset and is amortizing those
costs straight-line over the contract life of the franchise agreement to which they relate. During the six months ended March 31, 2021,
the activity in the contract asset account was as follows:
Balance, September 30, 2020
|
|
$
|
724,878
|
|
Commissions paid
|
|
|
(35
|
)
|
Commissions recognized into expense
|
|
|
(172,428
|
)
|
Balance, March 31, 2021
|
|
|
552,415
|
|
Current portion
|
|
|
(182,273
|
)
|
Prepaid commission expense, net of current portion
|
|
$
|
370,142
|
|
General Advertising Costs
General advertising costs are expensed
as incurred. The Company incurred general advertising costs for the three months and six months ended March 31, 2021 of $915 and $2,639,
respectively and $3,417 and $5,305, for the quarter and six months ended March 31, 2020.
Income Taxes
The provision for income taxes
and deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are determined based
on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability
that its net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion
is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance
is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized. Given
previous recurring losses, the Company cannot conclude that it is more likely than not that such assets will be realized, therefore a
full valuation allowance has been recorded during the six months ended March 31, 2021.
The Company reviews its filing
positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.
When there are uncertainties related
to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more
likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities.
The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of
the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more
likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its
effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained
with the ultimate realization being dependent on generating sufficient taxable income in future years. The final resolution of uncertain
tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows.
The Company’s policy is to
recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties
at March 31, 2021 and September 30, 2020, respectively, and has not recognized interest and/or penalties during the six months ended March
31, 2021, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized
tax benefits will occur within the next twelve months.
The tax years subject to examination
by major tax jurisdictions include the years 2015 and forward by the U.S. Internal Revenue Service.
Net earnings (loss) per share
Basic earnings per share are computed
by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per
share reflect the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted
during the period. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
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.
During the six months ended March
31, 2021, the Company issued 150,000 shares to a vendor in exchange for professional services and expensed $30,000 in connection with
the stock issuance.
Reclassifications
Certain prior year amounts have
been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of
operations.
Recent accounting pronouncements
All newly issued accounting pronouncements,
but not yet effective, have been deemed either immaterial or not applicable.
(2) Notes and Other Receivables
At March 31, 2021 and September
30, 2020, the Company held certain notes receivable totaling approximately $8,000 and $9,000, respectively, net of allowances, for extended
payment terms of franchise fees. The notes receivable bear interest of 4% per annum with monthly payments, payable within four years.
The Company analyzes the collectability of all receivables and reserves accordingly.
(3) Commitments and Contingencies
Litigation
The Company is subject to litigation
claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters in accordance
with the requirements of GAAP. The Company records litigation accruals for legal matters which are both probable and estimable and for
related legal costs as incurred. The Company does not reduce these liabilities for potential insurance or third-party recoveries.
On October 2, 2015, the Company
filed suit in the state court in St. John’s County, Florida, Case No. CA 15-1076, against its former Chief Executive Officer Brian
Pappas, Christine Pappas, its former Human Resources officer, and an independent company controlled by Mr. Pappas named Franventures,
LLC (“Franventures”). The lawsuit seeks return of Company emails and other electronic materials in the possession of the defendants,
Company control over the process by which the Company’s documents are identified, and a court judgment that the property is the
Company’s. Mr. and Mrs. Pappas have returned certain Company documents that they have identified, but other issues remain. On December
11, 2017, Brian Pappas filed a counterclaim alleging the Company is required to indemnify him for a multitude of matters. On October 8,
2020 the Court dismissed Brian Pappas’ indemnity counterclaim without prejudice.
In a separate suit, filed on March
7, 2016 in the state court in St. John’s County, Florida (Case No. CA 16-236), Franventures, LLC (“FV”) filed suit against
the Company alleging that it is due an unstated amount of money from the Company pursuant to a contract the Company had previously terminated.
On June 23, 2016, the Company filed a counterclaim against Franventures, which also included a complaint against former Chairman of the
Board and Chief Executive Officer Brian Pappas. The counterclaim seeks redress for losses and expenditures caused by alleged fraud, conversion
of company assets, and breaches of fiduciary duty that the Company alleges that defendants perpetrated upon CLC, including assertions
regarding actions by Brian Pappas that the Company alleges occurred while Mr. Pappas was serving as the Chief Executive Officer of CLC
and as a member of its board of directors. The Company is actively litigating this matter. On October 27, 2016, Brian Pappas filed a motion
to amend the complaint in Case No. CA 16-236 to add a claim alleging that the Company slandered him by virtue of a press release issued
on or about August 1, 2016, in which the Company reported to shareholders on steps it had taken and improvements it had implemented. The
motion has still not been ruled upon by the Court. If Mr. Pappas granted the right to amend his complaint and does so, the Company will
vigorously defend the proposed claim.
The Company’s complaint
against Mr. Pappas and Franventures (Case No. CA 15-1076) has been consolidated with Mr. Pappas’ and Franventures’ complaint
against the Company (Case No. CA 16-236) for purposes of discovery, but not for any other purpose.
On February 24, 2017, franchisee,
Team Kasa, LLC, along with its three owners, filed suit in the Eastern District of New York (Case No. 2:17-cv-01074) against former CEO
Brian Pappas and Franventures, as well as four other defendants seeking damages under the New York Franchise Sales Act. The same Plaintiffs
also initiated an arbitration proceeding against the Company on the same issues (American Arbitration Association, Case No. 01-17-0001-1968),
alleging the Company is jointly and severally liable for damages resulting from the allegations against Mr. Pappas and Franventures. The
Company is contesting the allegations and its liability for any damages in the arbitration case. Both cases have been held in abeyance
as the parties seek a resolution.
On November 8, 2017, franchisee,
Indy Bricks, LLC, along with its two owners, Ben and Kate Schreiber, initiated arbitration against the Company (American Arbitration
Association, Case No. 01-17-0006-8120). The Plaintiffs allege breach of contract, fraud, misrepresentations and omissions, violations
of the Indiana Franchise Act, and violations of the Indiana Deceptive Franchise Practices Act. On April 23, 2020, a settlement agreement
was entered into between the Plaintiffs and the Company under which the arbitration was dismissed. Pursuant to the settlement agreement,
Indy Bricks, LLC will pay the Company an agreed amount of past due franchise fees, monthly marketing and royalty fees, and monthly fees
to utilize the Company’s franchise management software.
(4) Sale of Condominium
On October 30, 2019 the Company
completed the sale of a condominium conference space for proceeds of approximately $100,000 and recorded a gain of approximately $21,000,
which represented the excess of the proceeds over the carrying value on that date.
(5) Related Party Transactions
Christopher Rego has been a director since February
5, 2020, and our Chief Executive Officer since May 1, 2020. Prior to his appointment, Mr. Rego purchased an active franchise in California.
During the six months ended March 31, 2021 the Company recognized royalty revenue from the franchise of $7,875 and recognized marketing
fee revenue from the franchise of $0. Total payments made by the franchisee were $2,834. As of March 31, 2021 and September 30, 2020 the
accounts receivable balance with the franchisee was $3,143 and $11,894, respectively and the franchisee had deferred revenue balances
of $0.
Christopher Rego, our chief executive
officer, is also the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10,
2020 to perform development and maintenance services in relation to the Company’s franchise management software. The term of the
agreement is six months, subject to auto-renewal until Teknowland had completed its obligations under the agreement, but subject to each
party’s right to terminate the agreement at any time on 30 days’ notice. Under the agreement, the Company was obligated to
pay Teknowland a fee of $12,900 per month for development and maintenance services. Starting in November 2020, the Company and Teknowland
orally agreed to reduce the monthly amount that the Company is obligated to pay to $3,000 per month.
During the year ended September
30, 2020, the Company and Mr. Rego orally agreed that Mr. Rego and Teknowland would develop an eLearning program to enable the Company
to offer educational programs over the internet. No agreement was reached regarding whether the Company or Teknowland would own the eLearning
program, or the terms under which the Company would be entitled to use the program on a long-term basis, whether as owner or licensee.
The Company orally agreed to pay Teknowland $10,000 per month for five months for hosting and content costs incurred by Teknowland, of
which $40,000 has been paid. After testing the program, the Company’s board decided in December 2020 not to pursue the E-Learning
program.
Beginning in January 2021, Teknowland
began hosting the Company’s website at a cost of $5,000 per month pursuant to an oral agreement.
On February 12, 2021, the Company,
Chris Rego and Teknowland entered into an agreement under which the parties mutually agreed to terminate the March 10, 2020 agreement
to develop and maintain the Company’s franchise management system, and the oral agreement under which Teknowland hosted the Company’s
website. In both cases, the Company has engaged an independent firm to provide the services. Under the same agreement, the Company agreed
to transfer and assign to Teknowland all of the Company’s rights in an E-Learning program developed by Teknowland for the Company.
The Company evaluated the E-Learning program on a trial basis, and elected not to pursue it as a line of business. The Company agreed
to pay Teknowland $50,000 to pay all invoices associated with the two agreements and the E-Learning program, of which $20,000 was payable
at execution of the agreement, $20,000 was payable 30 days later and $10,000 was payable 60 days later. As of March 31, 2021 $20,000 has
been paid and $30,000 is still owed.
During the six months
ended March 31, 2021, JoyAnn Kenny-Charlton, a director of the Company, agreed to relinquish 272,472 shares previously approved for issuance
to her for director services.
(6) Subsequent Events
None.