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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:
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:
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.
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. As
of September 30, 2021, the Company had 451 Bricks 4 Kidz® and Sew Fun Studios® global franchise territories, including
28 Bricks 4 Kidz® master franchises, and 134 Bricks 4 Kidz® sub-franchises operating in 39 countries.
Company Background
The Company was formed
in March 2006 under the name B2 Health, Inc. to design, manufacture and sell chiropractic tables and beds. The Company generated
only limited revenue and essentially abandoned its business plan in March 2008. In July 2010, the Company’s name was changed
to Creative Learning Corporation.
On July 2, 2010,
the Company acquired BFK Franchise Company, LLC (“BFK”), a Nevada limited liability company formed in May 2009, under
a Stock Exchange Agreement with the members of BFK for 9,000,000 shares of the Company’s common stock. BFK offers a franchise
concept known as Bricks 4 Kidz®, a mobile business operated by franchisees within a specific geographic territory offering
project-based programs designed to teach principles and methods of engineering to children ages 3-13+. BFK began selling franchises
in July 2009.
On January 26, 2015
the Company formed SF Franchise Company, LLC (“SF”) for the purpose of offering a second franchise concept known as
Sew Fun Studios®. Sew Fun Studios® is a mobile business operated by franchisees within a specific geographic territory
offering creative project-based activities, classes, and programs in fashion and interior design and sewing to children and adults.
During fiscal year
2020, the Company formed B4K eLearning LLC to offer academic programs including access to Stride, an online educational platform
that utilizes artificial intelligence to create lesson plans.
In July 2019, the
Company entered into an operating agreement for a joint venture known as Bricks4Schoolz, LLC, with BPL Enterprises for Bricks4Schoolz LLC
(“BPL”). Under the operating agreement, the joint venture is granted a license to distribute certain intellectual property
of the Company through a software system developed by BPL for the joint venture, provided that the joint venture may only distribute
the intellectual property to elementary and middle schools in territories which are not covered by an existing franchisee of the
Company. In July 2021, the Company acquired BPL’s interest in the joint venture, as well as any proprietary software and
content developed for the joint venture by BPL.
On December 7, 2021,
the Company, DriveItAway, Inc., a Delaware corporation (“DIA”), and the existing shareholders of DIA executed an Agreement
and Plan of Share Exchange (the “Share Exchange Agreement”), under which the Company would acquire all of the issued
and outstanding common stock of DIA by issuing one share of Series A Convertible Preferred Stock (the “Series A Preferred”)
of the Company for each outstanding share of DIA common stock (the “Share Exchange”). As a result of the Share Exchange,
DIA will become a wholly-owned subsidiary of the Company. Each share of Series A Preferred will be convertible into that number
of shares of common stock of the Company which would entitle the Series A Preferred holders to 85% of the Company’s common
stock, determined on a fully-diluted basis, but prior to any shares issued or issuable as a result of the Financing (as defined
below). The exact conversion rate of the Series A Preferred will be determined at closing of the Share Exchange. In addition, each
share of Series A Preferred will be entitled to dividends and voting rights on an “as converted” basis with the common
stockholders. Upon closing of the Share Exchange, all of the existing members of the board of directors (the “Board”)
of the Company have agreed to resign, and John Possumato, Adam Potash and Paul Patrizio will be appointed to the Company’s
Board. Upon closing of the Share Exchange, Christopher Rego and Rod Whiton have agreed to resign as officers, and upon their resignation
John Possumato will be appointed chief executive officer and Adam Potash will be appointed chief operating officer. Mike Elkin
has agreed to remain as chief financial officer of the Company. Closing of the Share Exchange Agreement is subject to a number
of conditions, and is expected to occur in the first quarter of 2022, provided that the closing conditions are satisfied or waived.
DIA is the first
national dealer focused mobility platform that enables car dealers to sell more vehicles in a seamless way through eCommerce, with
its exclusive “Pay as You Go” app-based subscription program. DIA provides a comprehensive turn-key, solutions driven
program with proprietary mobile technology and driver app, insurance coverages and training to get dealerships up and running quickly
and profitably in emerging online sales opportunities. The company is planning to soon to expand its easy and transparent consumer
app ‘subscription to ownership’ platform to enable entry level consumers to drive and acquire new electric vehicles.
On December 7, 2021,
the Company entered into a Sale Agreement with StroomX, LLC (the “Purchaser”), under which the Company agreed to sell
all of the Company’s subsidiaries (the “Learning Subsidiaries”) involved in its learning business (the
“Learning Business”), as well as any assets of the Learning Business that are not owned by the Learning Subsidiaries, to
the Purchaser. In connection with the sale, the Purchaser agreed to assume all liabilities of the Learning Business, and to
indemnify and hold the Company harmless from any such liabilities. The Purchaser is controlled by Christopher Rego, the
Company’s current chief executive officer. Closing of the sale will occur after the closing of the Share Exchange.
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.
At September 30,
2021, BFK had 274 global Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 28 Bricks 4 Kidz® master franchises,
and 134 Bricks 4 Kidz® sub-franchises operating in 39 countries. The following table details franchise activity:
BFK
|
|
|
Franchise
Territories
|
|
|
|
September 30, 2019
|
|
|
503
|
|
Additions
|
|
|
15
|
|
Terminations and non-renewals and cancellations
|
|
|
67
|
|
September 30, 2020
|
|
|
451
|
|
Additions
|
|
|
—
|
|
Terminations and non-renewals and cancellations
|
|
|
177
|
|
September 30, 2021
|
|
|
274
|
|
Current BFK
Programs
In-school workshops.
One-hour classes during school hours. Classes are correlated to the typical science curriculum for a particular grade level. Teacher
guides, student worksheets, and step-by-step instructions are provided.
After-school classes.
One hour, one day a week class held after school.
Pre-school classes.
Classes can be held in pre-schools for children of pre-school ages.
Classes for home-schooled
children. Classes can be held in the home of one of the parents of a home-schooled child.
Camps. Normally
three hours per day for five days. Camps can take place at schools or at other child-related venues. Children use LEGO® bricks
to explore various science and math concepts while working in an open, friendly environment. The material covered each session
varies depending on students’ ages, experience, and skill level. A new project is built each week. Architectural concepts
are taught while assembling buildings, castles and other structures. Instructional content includes concepts of friction, gravity
and torque, scale, gears, axles and beams. The children work and play with programmable LEGO® bricks along with electric motors,
sensors, system bricks, and LEGO® Technic pieces (i.e., gears, axles, and beams).
Birthday parties.
In the home of the birthday child.
Special events.
Activities with LEGO® bricks can be held in various locations including church centers, lodges, child-related venues, private
schools, pre-schools, etc. Program can include parents, grandparents and all children in the family.
BFK Franchise
Program
BKF sells franchises
both domestically and internationally. International sales can be a single franchise or a master franchise, where the master franchisee
operates a franchise in the territory, and is also able to develop, sell and manage sub-franchises in the territory under the master
franchise agreement. BFK does not offer master franchises in the United States.
Under a franchise
agreement, a franchisee pays a one-time, non-refundable franchise fee upon the execution of the franchise agreement. Domestically,
there can be variations on the franchise fees depending on the size or territories being purchased, and other factors of the territory.
The typical-sized, domestic, single territory franchise fee is $30,000. If the franchisee is granted an additional geographic area
to increase the size of their territory, then the franchisee must pay an additional fee. If the franchisee is in good standing
and is granted a second or additional franchise, then the franchisee must pay a franchise fee for each additional franchise.
International franchise
fees vary and are set relative to the potential of the franchised territories. During the fiscal year ended September 30, 2021,
BFK sold no master franchises. In the case of a master franchise, BFK receives a percentage of the franchise fee paid to the master
franchisee by any sub-franchisee operating in the master franchisee’s territory.
The Company uses
a network of franchise marketing and promotion media to contact prospective franchisees. When a potential contact is received,
the initial information relating to a buyer is passed to a franchise sales broker or director of business development to initiate
contact with the potential new franchisees. The responsibility of the sales broker and/or director of business development is to
vet the potential franchisee for compatibility with the franchise concept, among other things. As part of the process of vetting
potential franchisees, the Company requires all prospective franchisees to complete a Request for Consideration form. Upon completion
of the process the sales broker is paid a commission typically ranging from 20% to 30% of the franchise fee while the director
of business development commission ranges between 5% to 7% and the Marketing Director earns 1%.
The franchisee is
granted a limited exclusive territory and a license to use the “Bricks 4 Kidz®” name, trademarks and course materials
in the franchised territory. The franchisee is required to conform to certain standards of business practices and comply with all
applicable laws. Each franchise is run as an independent business and, as such, is responsible for its operation, including employment
of adequate staff.
The term of the franchise
is for ten years. Subject to any applicable laws, BFK has the right to terminate any franchisee in the event of the franchisee’s
bankruptcy, a default under the franchise agreement, or other events. The franchisee has the right to renew the franchise for an
additional ten years if, at the time of renewal, the franchisee is in good standing and pays a renewal fee in the amount of $5,000.
During FY2018, the Company, in accordance with FTC Franchise Rule 436.7(a), suspended sales of new franchises in the United States
as the Company awaited the completion of its audited financial statements. The Company obtained approval to offer and sell new
franchises in many jurisdictions in fiscal 2021; however, new sales continued to be hampered by the COVID-19 pandemic.
Franchise Disclosure
Document
Under federal law,
the Company is required to (a) prepare a franchise disclosure document (“FDD”) including federally mandated information,
(b) provide each prospective franchisee with a copy of the FDD, and (c) wait 14 calendar days before entering into a binding agreement
with the prospective franchisee or collecting any payment from any prospective franchisee. Federal law does not regulate the franchise
relationship or require any filing or registration of the FDD on the part of a franchisor. The Company is also required to comply
with certain state regulations in connection with the offer and sale of franchises, including the requirement to submit the
FDD for registration with a number of states before offering or selling franchises within those states. The states requiring registration
of the FDD are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South
Dakota, Virginia, Washington and Wisconsin. In these states, state regulatory agencies review the FDD to confirm compliance with
state statutory requirements. These state agencies can deny registration of the FDD if they determine that the FDD fails to meet
state statutory requirements. If a state denies the issuance of an effective registration, a franchisor is prohibited from offering
or selling franchises in that state. See “Government Regulation” below for more information.
Royalty and
Marketing Fees
The Company invoices
all applicable franchisees a royalty fee on a monthly basis based on either a flat fee structure or seven percent of revenue. Every
U.S. franchisee, upon signing a franchise agreement, has authorized and provided the required banking information to allow the
electronic collection of all fees. Approximately three days after the invoice has been issued to the franchisee, an ACH draft (automatic
deduction from the franchisee bank account) for the royalty fee withdrawal is processed through the Company’s banking system.
When the Company changes its royalty structure, existing franchisees maintain their contractual franchise royalty rate unless they
agree to amend those rates.
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, 2017 through September 30, 2018
|
|
$
|
450 USD
|
|
October 1, 2018 through September 30, 2019
|
|
$
|
475 USD
|
|
October 1, 2019 through September 30, 2020
|
|
$
|
500 USD
|
|
October 1, 2020 through September 30, 2021
|
|
$
|
500 USD
|
|
October 1, 2021 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, 2019 through September 30, 2020
|
|
$
|
250 USD
|
|
October 1, 2020 through September 30, 2021
|
|
$
|
250 USD
|
|
October 1, 2021 and for the remainder of the initial term of the Franchise Agreement
|
|
$
|
250 USD
|
|
BFK administers a
marketing fund for domestic and Canadian franchisees for the purpose of building brand awareness in their respective countries.
The marketing fund expenditures are funded by BFK collecting a 2% marketing fee, based upon gross receipts reported in the Franchise
Management Tool (“FMT”), from domestic and Canadian franchisees. The respective franchisees are typically invoiced
the middle of each month for the prior month’s receipts. These marketing fee receipts and expenses are reported on the statement
of operations on a gross revenue basis, presenting receipts as revenue and expenses as operating expenses. Any receipts that exceed
expenditures are recorded as a liability on the balance sheet. The collections of these funds are done using the Company’s
ACH program, as agreed to by each franchisee in their Franchise Agreement. The Marketing Fund is segregated into a separate bank
account. In April 2018, the third party provider of the FMT restricted the Company’s access to the software. As a result,
franchisees were instructed to self-report their marketing fees, however many franchisees did not comply with this request. These
past due marketing fees will be addressed once COVID-19 is no longer an issue. During 2021, the Company eased up on collection
efforts for the outstanding marketing fees and did not bill out any new marketing fees due to the COVID-19 pandemic.
BFK Competition
Although BFK pioneered
the LEGO® modeling-based curriculum for afterschool programs, we believe there are at least two other companies franchising
a model similar to that of Bricks 4 Kidz®, Engineering 4 Kids and Snapology. Play-Well Teknologies offers after-school classes,
camps and birthday parties using LEGO® bricks. Vision Education and Media offers after school classes using LEGO® bricks
in the New York metropolitan area. In addition, several other small businesses around the country offer after-school classes and
vacation camps using LEGO® bricks. These classes and camps are typically held in elementary schools, middle schools and community
colleges.
Sew Fun Studios
As a result of an
unexpectedly lengthy audit process for fiscal year 2018, the Company was unable to sell franchises for a good portion of the year,
because the Company’s FDD required audited financial statements. When the audit was completed, the Company focused its efforts
on the Bricks4Kidz franchises. Plans for expanding and marketing Sew Fun Studies were placed on hold. At September 30, 2021, SF
had no franchise territories.
Bricks4Schoolz
In July 2019, the
Company entered into an operating agreement for a joint venture known as Bricks4Schoolz, LLC, with BPL. Under the operating agreement,
the joint venture is granted a license to distribute certain intellectual property of the Company through a software system developed
by BPL for the joint venture, provided that the joint venture may only distribute the intellectual property to elementary and middle
schools in territories which are not covered by an existing franchisee of the Company. The Company originally acquired a 49% interest
in the joint venture, and BPL owned the remaining 51%, and was entitled to a 12% royalty on all gross sales generated by the joint
venture. In addition, BPL was the exclusive manager of the joint venture, and in that capacity had sole control of the joint venture.
BPL was responsible contributing all capital required by the joint venture, and was entitled to recoup all of its capital contributions
before any profits or distributions are allocable to the Company’s interest. In July 2021, the Company acquired BPL’s
interest in the joint venture, as well as any proprietary software and content developed for the joint venture by BPL, in settlement
of disputes with BPL over the joint venture.
Franchising Process
Initial contact between
a potential franchisee and the Company may result from a potential franchisee contacting the Company, either by phone or electronically.
Potential franchisees may also be introduced to the Company by brokers and/or other parties, and the Company may pay commissions
and consulting fees to the brokers. The Company has discontinued its previous practice of introducing franchisee candidates to
third party financing sources to cover franchising expenses, as well as, paying commissions and consulting fees to the Company’s
directors and officers.
After initial contact,
one of the Company’s franchise consultants and/or internal sales personnel interviews each prospective franchisee (the “candidate”)
to determine whether the candidate may make a successful franchisee. If the franchise consultant determines that the candidate
may make a successful franchisee, the candidate submits a request for consideration (“RFC”). The Company reviews the
RFC, and if the RFC is approved, the franchise consultant continues the vetting process, which focuses on financial and other factors.
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.
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 offers and sales did not affect the Company’s international franchise offer and sales activity
or its royalty fee collections from existing franchisees. The Company has also currently temporarily suspended domestic franchise
offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in compliance with FTC Franchise Rule, Section 436.7(a)
due to delay in completion of the Company’s fiscal year 2018 consolidated audited financial statements. In turn, this delayed
completion of the Company’s 2018 and 2019 FDDs for the Bricks 4 Kidz® and Sew Fun Studios® franchise offerings.
General
During fiscal 2020,
the Company sold its two properties in Florida and transitioned to a Boise, Idaho location for which an office lease was signed
for space at 5995 W State Street Suite B, Garden City, ID 83703. On November 1, 2020 the Company relocated to Florida for which
a one-year office lease was signed for office space at 475 W Townplace, Suite, A, St Augustine, FL 32092. On October 21, 2021,
the Company signed a new lease for office space at 1637 S. Main Street, Milpitas, CA 94035, and relocated its office there on November
1, 2021.
At September 30,
2021, the Company had 4 full-time employees.
Available Information
We make available
free of charge on our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished
to the Securities and Exchange Commission, or (the “SEC”). Our corporate website is www.creativelearningcorp.com. The
information in this website is not a part of this report.
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
Nature of our Business is Uncertain
On December 7, 2021,
we entered into an agreement to effect the Share Exchange, which will result in our acquisition of DIA by the issuance of a new
series of preferred stock that will be convertible into approximately 85% of our common stock on a fully diluted basis. On the
same date, we entered into a separate agreement to dispose of our Learning Business to an entity controlled by our chief executive
officer. The disposal of the Learning Business will not occur until after we complete the acquisition of DIA. The acquisition of
DIA is subject to a number of material conditions, including that DIA and us raise at least $700,000 in a private placement of
our common stock and warrants (the “DIA Financing”). DIA operates a mobility platform that enables car dealers to sell
more vehicles in a seamless way through eCommerce.
If the Share Exchange
and the disposition of the Learning Business closes, the nature of our business and capital structure will change dramatically.
All of the risk factors set forth below that relate to the Learning Business will be irrelevant to an investment in our common
stock. At or shortly after the Share Exchange closes, we plan to file a Current Report on Form 8-K that includes, among other things,
information about DIA’s business and risk factors related to an investment in its business. Until that Form 8-K is filed,
investors in our common stock may not have sufficient information with which to evaluate the risks of an investment in our common
stock as it will exist if the Share Exchange and sale of the Learning Business closes.
Our recorded revenues decreased
in fiscal year 2021 as compared to fiscal year 2020
Our reported revenues
decreased significantly in fiscal year 2021 to approximately $2,195,000 from $3,038,000 in the prior year, a decrease of approximately
$843,000 or 28%, The primary cause of the decrease in royalties and technology fees was due to the fewer franchises paying royalties
and technology fees as a result of the termination of non-performing franchisees from the system, and the interruption of normal
operation at remaining franchises because of the COVID-19 pandemic. Also, due to the impact of the COVID-19 pandemic on the business
of our franchisees, we voluntarily elected to cease pursuing collections of our marketing fees from our franchisees in March 2020,
which continued for all of fiscal 2021. While the company experienced no master franchise sales, through a series of cost cutting
measures, the Company was able to generate a profit in all four quarters of the reporting year. Should we begin to incur losses
or be unable to reverse its decline in revenues, our ability to attract new franchisees and maintain positive working relationships
with our current franchisees may be impaired. In addition, if we incur losses, we may need to seek additional financing which could
be dilutive to our stockholders.
The recent COVID-19 outbreak has
been declared a pandemic by the World Health Organization, has spread to the United States and many other parts of the world and
has adversely affected our business operations, employee availability, financial condition, liquidity and cash flow and the length
of such impacts are uncertain.
The outbreak of the
COVID-19 continues to grow both in the United States and globally, and related government and private sector responsive actions
have and will continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact
of the COVID-19 pandemic as the situation is rapidly evolving.
The spread of COVID-19
has caused public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating
in heavily populated areas, such as malls and shopping centers. Among the precautions was the cessation of in-person learning at
a substantial portion of the schools in the United States, which will adversely impact our royalty revenue from franchisees and
our ability to sell new franchises. There is significant uncertainty around the breadth and duration of these school closures and
other business disruptions related to COVID-19, as well as its impact on the U.S. and global economy. Many public schools resumed
some or all in person learning in the Fall of 2021, but many have since reverted back to remote learning with the advent of the
Omicron strain of COVID-19 in December 2021. The extent to which COVID-19 impacts our results will depend on future developments,
which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19
and the actions taken to contain it or treat its impact. We have asked our corporate employees whose jobs allow them to work remotely
to do so for the foreseeable future. Such precautionary measures could create operational challenges as we adjust to a remote workforce,
which could adversely impact our business.
Our financial results are affected
by the operating and financial results of and our relationships with our franchisees.
A substantial portion
of our revenues come from royalties, which have been generally based on a percentage of our franchisees’ revenues. As a result,
our financial results have been largely dependent upon the operational and financial results of our franchisees. Negative economic
conditions, including inflation, increased unemployment levels and the effect of decreased consumer confidence or changes in consumer
behavior, could materially harm our franchisees’ financial condition, which would cause our royalty and other revenues to
decline and materially and adversely affect our results of operations and financial condition as a result. In addition, if our
franchisees fail to renew their franchise agreements, stop operating their franchise business or enter into a termination agreement
with the Company, these revenues may decrease, which in turn could materially and adversely affect our results of operations and
financial condition. In part to support franchisee growth and financial planning and to enrich relations with our franchisees,
we altered its royalty fee structure beginning and effective October 1, 2015 to change it to a fixed monthly charge on an escalating
scale over five years.
Our franchisees could take actions
that harm our business.
Our franchisees are
independent third-party business owners who are contractually obligated to operate in accordance with the operational and other
standards set forth in the franchise agreement. Although we engage in a thorough screening process when reviewing potential franchisee
candidates, we cannot be certain that our franchisees will have the business acumen or financial resources necessary to operate
successful franchises in their approved territories. In addition, certain state franchise laws may limit our ability to terminate,
not renew or modify these franchise agreements. As independent business owners, the franchisees oversee their own daily operations.
As a result, the ultimate success and quality of any franchise rests with the franchisee. If franchisees do not successfully operate
in a manner consistent with required standards and comply with local laws and regulations, franchise fees and royalties paid to
us may be adversely affected and our brand image and reputation could be harmed, which in turn could adversely affect our results
of operations and financial condition.
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:
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actions taken (or not taken) by one or more franchisees or their employees relating to health, safety, welfare or otherwise;
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data security breaches or fraudulent activities associated with our and our franchisees’ electronic payment systems;
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litigation and legal claims;
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third-party misappropriation, dilution or infringement of our intellectual property; and
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illegal activity targeted at us or others.
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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:
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availability and cost of financing;
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securing required domestic or foreign governmental permits and approvals;
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trends in new geographic regions and acceptance of our products and services;
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competition with competing franchise systems;
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employment, training and retention of qualified personnel; and
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general economic and business conditions.
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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.
Our future growth could place
strains on our management, employees, information systems and internal controls, which may adversely impact our business.
Our future growth
may place significant demands on our administrative, operational, financial and other resources. Any failure to manage growth effectively
could seriously harm our business. To be successful, we will need to continue to implement management information systems and improve
our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain
close coordination among our executive, accounting, finance, legal, human resources, risk management, marketing, technology, sales
and operations functions. These processes are time-consuming and expensive, increase management responsibilities and divert management
attention, and we may not realize a return on our investment in these processes. Our failure to successfully execute on our planned
expansion could materially and adversely affect our results of operations and financial condition.
Changing economic conditions,
including unemployment rates, may reduce demand for our products and services.
Our revenues and
other financial results are subject to general economic conditions. Our revenues depend, in part, on the number of dual-income
families and working single parents who require child development or educational services. A deterioration of general economic
conditions, including a soft housing market and/or rising unemployment, may adversely impact us because of the tendency of out-of-work
parents to diminish or discontinue utilization of these services. Finally, there can be no assurance that demographic trends, including
the number of dual-income families in the workforce, will continue to lead to increased demand for our products and services.
We may require additional financing
to execute our business plan and fund our other liquidity needs.
We currently have
no revolving credit facility or other committed source of recurring capital. While the company is currently on positive financial
footing, should an economically catastrophic event transpire, and if we are unable to increase our revenues or decrease our operating
expenses from recent historical run-rate levels, we expect that we would need to obtain additional capital to fund our planned
operations. Should our cash flows from operations not meet or exceed our projections, we may need to pursue one or more alternatives,
such as to:
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reduce or delay planned capital expenditures or investments in our business;
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seek additional financing or restructure or refinance all or a portion of our indebtedness at or before maturity;
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sell assets or businesses;
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sell additional equity; or
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curtail our operations.
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Any such actions
may materially and adversely affect our future prospects. In addition, we cannot ensure that we will be able to raise additional
equity capital, restructure or refinance any of our indebtedness or obtain additional financing on commercially reasonable terms
or at all.
Any long-term indebtedness we
may incur could adversely affect our business and limit our ability to expand our business or respond to changes, and we may be
unable to generate sufficient cash flow to satisfy our debt service obligations.
We currently have
no outstanding debt, other than the current liabilities reflected in the accompanying consolidated financial statements. We may
incur indebtedness in the future. Any long-term indebtedness we may incur and the fact that a substantial portion of our cash flow
from operating activities could be needed to make payments on this indebtedness could have adverse consequences, including the
following:
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reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities, and other purposes;
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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;
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limiting our ability to borrow additional funds;
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increasing our vulnerability to general adverse economic and industry conditions; and
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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.
In addition, each
franchise agreement has an expiration date. Upon the expiration of a franchise agreement, we or the franchisee may, or may not,
elect to renew the franchise agreement. If the franchise agreement is renewed, the franchisee will receive a “successor”
franchise agreement for an additional term. Such option, however, is contingent on the franchisee’s execution of our then-current
form of franchise agreement (which may include increased royalty revenues, marketing fees and other fees and costs), the satisfaction
of certain conditions and the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing
conditions, the expiring franchise agreement will terminate upon expiration of its term. Our right to elect to not renew a franchise
agreement may be subject to certain limitations under any applicable state relationship laws that may require specific notice periods
or “good cause” for non-renewal despite the provisions in the franchise agreement.
Franchisee litigation;
effects of regulatory efforts. We and our franchisees are subject to a variety of litigation risks, including, but not limited
to, customer claims, personal injury claims, litigation with or involving our relationship with franchisees, litigation alleging
that the franchisees are our employees or that we are the co-employer of our franchisees’ employees, employee allegations
against the franchisee or us of improper termination and discrimination, landlord/tenant disputes and intellectual property claims,
among others. Each of these claims may increase costs, reduce the execution of new franchise agreements and affect the scope and
terms of insurance or indemnifications we and our franchisees may have. In addition, we and our franchisees are subject to various
regulatory enforcement actions regarding among other things franchise and employment laws, such as: failure to comply with franchise
registration and disclosure requirements; the provision to prospective franchisees of business projections; efforts to categorize
franchisors as the co-employers of their franchisees’ employees; legislation to categorize individual franchised businesses
as large employers for the purposes of various employment benefits; and other legislation or regulations that may have a disproportionate
impact on franchisors and/or franchised businesses. These changes may impose greater costs and regulatory burdens on franchising,
and negatively affect our ability to sell new franchises.
Franchise agreements
and franchisee relationships. Our franchisees develop and operate their business under terms set forth in our franchise agreements.
These agreements give rise to long-term relationships that involve a complex set of mutual obligations and mutual cooperation.
We have a standard set of franchise agreements that we typically use with our franchisees, but various franchisees have negotiated
specific terms in these agreements. Furthermore, we may from time to time negotiate terms of our franchise agreements with individual
franchisees or groups of franchisees (e.g., a franchisee association). We seek to have positive relationships with our franchisees,
based in part on our common understanding of our mutual rights and obligations under our agreements, to enable both the franchisees’
business and our business to be successful. However, we and our franchisees may not always maintain a positive relationship or
always interpret our agreements in the same way. Our failure to have positive relationships with our franchisees could individually
or in the aggregate cause us to change or limit our business practices, which may make our business model less attractive to our
franchisees or our members.
While our franchisee
revenues are not concentrated among one or a small number of parties, the success of our business is significantly affected by
our ability to maintain contractual relationships with profitable franchisees. A typical franchise agreement has a ten-year term.
If we fail to maintain or renew our contractual relationships on acceptable terms, or if one or more significant franchisees were
to become insolvent or otherwise were unwilling to pay amounts due to us, our business, reputation, financial condition and results
of operations could be materially adversely affected.
Our business is subject to various
laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations,
could adversely affect our business.
We are subject to
the FTC Franchise Rule promulgated by the FTC that regulates the offer and sale of franchises in the United States and that requires
us to provide to all prospective franchisees certain mandatory disclosure in a FDD. In addition, we are subject to state franchise
sales laws in 14 states that regulate the offer and sale of franchises by requiring us to make a franchise filing and, in some
instances, or obtain approval by the state franchise agency of that filing prior to our making any offer or sale of a franchise
in those states and to provide a FDD to prospective franchisees in accordance with such laws. We are also subject to franchise
laws in certain provinces in Canada, which, like the FTC Franchise Rule, require presale disclosure to prospective franchisees
prior to the sale of a franchise. We must also comply with international laws, including franchise laws, in the countries where
we have franchise operations or conduct franchise offer and sales activities. Failure to comply with such laws may result in a
franchisee’s right to rescind its franchise agreement and to seek damages, and may result in investigations or actions from
federal or state franchise authorities, civil fines or penalties, and stop orders, among other remedies. We are also subject to
franchise relationship laws in approximately 24 states that regulate many aspects of the franchisor-franchisee relationship, including
renewals and terminations of franchise agreements, franchise transfers, the applicable law and venue in which franchise disputes
must be resolved, discrimination and franchisees’ right to associate, among others. Our failure to comply with such franchise
relationship laws could result in fines, damages, restitution and our inability to enforce franchise agreements where we have violated
such laws. Our non-compliance with federal and state franchise laws could result in liability to franchisees and regulatory authorities
(as described above), inability to enforce our franchise agreements, required rescission of franchise agreements and a reduction
in our anticipated royalty revenue, which in turn may materially and adversely affect our business and results of operating.
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:
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laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and
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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.
|
The laws of certain
foreign countries may not protect the use of unregistered trademarks or other proprietary rights to the same extent as do the laws
of the United States. As a result, international protection of our image may be limited and our right to use our trademarks and
other proprietary rights outside the United States could be impaired. Other persons or entities may have rights to trademarks that
contain portions of our marks or may have registered similar or competing marks for digital signage in foreign countries. There
may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries. Our inability
to register our trademarks or other proprietary rights or purchase or license the right to use the relevant trademarks or other
proprietary rights in these jurisdictions could limit our ability to penetrate new markets in jurisdictions outside the United
States.
Litigation may be
necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims
by third parties alleging that we infringe, dilute or otherwise violate third-party trademark or other intellectual property rights.
Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in
substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition,
results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise
of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms,
if available at all or prevent us from manufacturing or selling certain products, any of which could have a material adverse effect
on our business, financial condition, results of operations or cash flows.
We may face intellectual property
infringement claims that could be time-consuming, costly to defend and result in its loss of significant rights.
Other parties may
assert intellectual property infringement claims against us, and our products and services may infringe the intellectual property
rights of third parties. We may also initiate claims against third parties to defend our intellectual property. Intellectual property
litigation is expensive and time-consuming and could divert management’s attention from our core business. If there is a
successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement,
develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if
at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business.
Also, we may be unaware of filed patent applications that relate to our products. Parties making infringement claims may be able
to obtain an injunction, which could prevent us from operating portions of our business or using technology that contains the allegedly
infringing intellectual property. Any intellectual property litigation could adversely affect our business, financial condition
or results of operations.
We depend on key executive management
and other key personnel, and may not be able to retain or replace these individuals or recruit additional personnel, which could
harm our business.
Because of intense
competition for our employees and because of other risk factors identified in this report, we may be unable to retain our management
team and other key personnel and may be unable to find qualified replacements. All of our key employees are employed on an “at
will” basis and we do not have key-man life insurance covering any of our employees. The loss of the services of any of our
executive management members or other key personnel could have a material adverse effect on our business and prospects, as we may
not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at
all.
We could be subject to changes
in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.
We are subject to
income taxes in the U.S. and other foreign jurisdictions. Significant judgment is required in determining our tax provision for
income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination
is uncertain. We are subject to the examination of our income tax returns, payroll taxes and other tax matters by the Internal
Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse
outcome resulting from these examinations to determine the adequacy of its provision for income taxes and payroll tax accruals.
There can be no assurances as to the outcome of these examinations. Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation could be materially different from our historical tax provisions and payroll
accruals. The results of an audit or litigation could have a material effect on our consolidated financial statements in the period
or periods for which that determination is made. Our effective income tax rate in the future could be adversely affected by a number
of factors, including changes in the mix of earnings in countries with different statutory tax rates, changes in tax laws, the
outcome of income tax audits, and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
Risks Related to Our Common Stock
The concentration of our capital
stock ownership with insiders will likely limit your ability to influence corporate matters.
As of December 31,
2021, our executive officers, directors, significant shareholders and affiliated persons and entities, collectively, beneficially
owned approximately 38.5% of our outstanding common stock. If the Share Exchange and the disposition of our Learning Business occurs,
we project that officers, directors, significant shareholders and affiliated persons and entities will, through a new series of
preferred stock, control in excess of 80% of the votes on any matter that requires the approval of our stockholders. As a result,
these persons and entities have the ability to exercise control over most matters that require approval by our stockholders, including
the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders
oppose them. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company
that other stockholders may view as beneficial.
Compliance with the Sarbanes-Oxley
Act of 2002 will require substantial financial and management resources.
Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our system of internal controls and, if and when we are no longer
a “smaller reporting company,” will require that we have such a system of internal controls audited. If we fail to
maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or
Stockholder litigation. Any inability to provide reliable financial reports could harm our business. Furthermore, any failure to
implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial
processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations.
Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have
a negative effect on the trading price of our securities.
We currently are eligible to deregister
our Common Stock from SEC reporting requirements.
Upon filing this
Form 10-K and Form 10-Q for the subsequent quarter, we will be eligible to deregister our securities from the reporting requirements
of the Securities Exchange Act of 1934, as amended as we currently have less than 300 shareholders of record and our Common Stock
is not listed on a stock exchange. If our Common Stock is deregistered, it may be more difficult to receive information of the
Company which could affect the liquidity of our Common Stock.
Provisions in our charter documents
and Delaware law may discourage or delay an acquisition that stockholders may consider favorable, which could decrease the value
of our common stock.
Our certificate of
incorporation, our bylaws, and Delaware corporate law contain provisions that could make it harder for a third party to acquire
us without the consent of our board of directors (the “Board”). These provisions include those that: authorize the
issuance of up to 10,000,000 shares of preferred stock in one or more series without a stockholder vote. In addition, in certain
circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15%
or more of our outstanding common stock, though we are not currently subject to this limitation because our Common Stock is not
listed on a national securities exchange and we have less than 2,000 stockholders of record.
We have not paid cash dividends
to our shareholders and currently have no plans to pay future cash dividends.
We plan to retain
earnings to finance future growth and have no current plans to pay cash dividends to shareholders. Any indebtedness that we incur
in the future may also limit our ability to pay dividends. Because we have not paid cash dividends, holders of our securities will
experience a gain on their investment in our securities only in the case of an appreciation of value of our securities. You should
neither expect to receive dividend income from investing in our securities nor an appreciation in value.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
On October 21, 2021,
the Company leased approximately 2,480 square feet of office space at 1637 S. Main Street, Milpitas, CA 94035 for its corporate
offices. The lease has a term of two years and one month. The Company is obligated to pay base rent of $4,588 per month in the
first year, $4,726 per month in the second year, and $4,867 per month in the last month, plus a pro rata share of common area expenses.
Item 3. Legal Proceedings
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 sought 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 had returned certain Company documents that they
have identified, but other issues remained. 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 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. 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 Company’s
complaint against Mr. Pappas and Franventures (Case No. CA 15-1076) was 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 May 22, 2021,
the Company, Brian Pappas, Christine Pappas and Franventures entered into an agreement under which the parties agreed to mutually
release all parties from any claims or causes of action that they have against the other, including without limitation any claims
asserted in Case No. CA 15-1076 and Case No. CA 16-236. The Company agreed to pay Brian Pappas and his assigns 60 consecutive,
monthly payments of $4,000 commencing on June 1, 2021 and continuing through June 1, 2026.
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 agreed to 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.
Item 4. Mine Safety Disclosures
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
Our directors and
executive officers and their ages at December 31, 2021, are listed in the following table:
Name
|
|
Age
|
|
Title
|
Christopher Rego
|
|
51
|
|
Director and Chief Executive Officer
|
Rod K. Whiton
|
|
52
|
|
Director and President
|
John Simento
|
|
60
|
|
Director
|
R. Gary Zell, II
|
|
54
|
|
Director
|
Mike Elkin
|
|
65
|
|
Chief Financial Officer
|
Christopher Rego
became a director in February 2020, at which time he also became chief executive officer of BFK Franchise Company, LLC (“BFK”),
our principal operating subsidiary. On April 30, 2020, Mr. Rego became Chief Executive Officer of the Company. Mr. Rego has over
20 years of software quality development experience building complex enterprise applications with high-performance requirements
in the business-to-business, software-as-a-service, and consumer advertising industries. Mr. Rego is an accomplished corporate
strategist and drives the vision and strategic direction of his software company, Teknowland, Inc., and his STREAM education company,
Bricknowland, Inc. Mr. Rego has assembled a dedicated team of engineers that focuses on building STREAM education that includes
AR/VR learning technology, drones, artificial intelligent education, 3-D printing, coding, and more. Mr. Rego has been the CEO
of Teknowland, Inc. since 2013, and the founder and managing partner of Bricknowland, Inc., since 2015. From March 2014 until April
2016, Mr. Rego was Quality Assurance Consulting/Manager at Tibco Software. Mr. Rego has also held various management and architect
roles to contribute to the success of rapidly growing technology companies such as Oracle, Yahoo!, Tapjoy, and Intuit. Mr. Rego
has been a Bricks 4 Kidz franchisee since November 2013, and has been a partner with Mr. Simento in a Bricks 4 Kidz franchise in
the United Arab Emirates since May 2015. Mr. Rego earned a Bachelor of Science degree from Andhra Loyola College in Andhra Pradesh
India and an MBA in Marketing and Finance from Acharya Nagarjuna University Andhra Pradesh, India.
Rod K. Whiton
became a director in February 2020. On June 2, 2020, Mr. Whiton became the president of the Company. Mr. Whiton has over 20 years
of experience managing public and private investments. His experience focuses largely on early stage and turnaround operations
in franchising, technology, biometrics, manufacturing, and payment processing. In addition, Mr. Whiton was an early investor in
the Company and served as its Interim CEO from July 22, 2015 to May 11, 2017. He has owned and managed a successful private cosmetics
company for over 10 years. From October 2016 to the present, Mr. Whiton has been managing member of Trew Pharma LLC, which used
to manufacture, markets, and distributes beauty products (but is in the process of winding down operations), and from January 2019
to the present has been CEO of Smart Tires USA LLC, a franchise company that provides a rent-to-own program for tires.
John Simento
has served as a director of the Company since May 19, 2020. Mr. Simento is the co-founder and managing partner of Almoe Group of
Companies, founded in 1994, Specktron Educational Products, founded in 2011 and Bricknowland founded in 2015. Mr. Simento has over
three decades of executive leadership experience managing high-technology and high-growth companies, having been responsible for
strategic direction, execution of business plans, technology development, and development of corporate infrastructure. Almoe Group
of Companies consists of six divisions, employs over 400 staff spread across four countries, and has over 40 renowned audio visual
and IT products and solutions. The Almoe Group of Companies partners with over 55 audio and video and software companies that provide
AV and software solutions to retail, corporate, and education institutions. Mr Simento created his own product line, Specktron
(www.specktron.com) that is a leading brand pioneering in Audio Visual and Information & Communication Technology. Specktron
has championed the use of Interactive Touch Technology for the education, corporate, government, and hospitality sectors. Mr. Simento
has been a partner with Mr. Rego in a Bricks 4 Kidz franchise in the United Arab Emirates since May 2015.
R. Gary Zell,
II has served as a director of the Company since May 19, 2020. Mr. Zell has been a Multiple Line General Agent with American
National Insurance Company since 1994, responsible for sales, profitability, and recruiting of a $62 million+ insurance agency
with over 70 agents and subproducers. From 2016 to the present, Mr. Zell has been president of ThirdPatent Holdings and ThirdPro
HMM, which provide social media audits for parents, colleges, universities, human resources professionals, and professional sports.
Mr. Zell earned a Bachelors Degree in Economics from Sewanee: The University of the South in Sewanee, Tennessee.
Mike Elkin
became the Company’s Chief Financial Officer on October 1, 2020. Mr. Elkin has over 20 years of experience as a controller
and financial manager. His experience includes providing financial and accounting advice to REIT’s, non-profits and turnaround
situations in the manufacturing, distribution and service company sectors. Since 2017, Mr. Elkin has served as the controller for
a private Real Estate Investment Trust (“REIT”). From 2005 to 2006, Mr. Elkin operated a consulting business in which
he served as part-time controller or chief financial officer for various private businesses. Mr. Elkin has a B.S. Degree in Accounting
from the University of Florida, a Masters Degree in Accounting from Nova Southeastern University, and a Masters Degree in Finance
from Florida International University. Mr. Elkin has been recognized by the Jacksonville Business Journal as CFO of the year. He
was also honored by the Jacksonville Jewish Journal for Social Action Work in the community.
None of the directors
and executive officers share any familial relationship with any other executive officers or key employees.
None of the directors
and executive officers has been involved in any legal proceedings as listed in Regulation S-K, Item 401(f).
Director Nomination Process
Our Board is responsible
for overseeing the selection of persons to be nominated to serve on our Board, and has not formed separate nominating committee.
The Board believes that nominating decisions are best determined by the entire board in light of a recent proxy solicitation effort
by certain shareholders to make changes to the board’s composition. The Board does not have a formal policy on Board candidate
qualifications. The Board may consider those factors it deems appropriate in evaluating director nominees made either by the Board
or stockholders, including judgment, skill, strength of character, experience with businesses and organizations comparable in size
or scope to the Company, experience and skill relative to other Board members, and specialized knowledge or experience. Depending
upon the current needs of the Board, certain factors may be weighed more or less heavily. In considering candidates for the Board,
the directors evaluate the entirety of each candidate’s credentials and do not have any specific minimum qualifications that
must be met. “Diversity,” as such, is not a criterion that the Board considers. The directors will consider candidates
from any reasonable source, including current Board members, stockholders, professional search firms or other persons. The directors
will not evaluate candidates differently based on who has made the recommendation.
The Board nomination
process is designed to ensure that the Board fulfills its responsibility to recommend candidates who are properly qualified to
serve the Company for the benefit of all of its stockholders, consistent with the standards established by the Board under our
corporate governance principles. There have been no material changes to the procedures by which shareholders may recommend nominees
to our board of directors.
Audit Committee Functions
Since May 2020, we
have not had a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(a) of the Exchange
Act. Prior to May 2020, we had an Audit Committee, the only member of which was Gary Herman. When constituted, the Audit
Committee is responsible for oversight of the quality and integrity of the accounting, auditing and reporting practices of the
Company. More specifically, it assists the Board of Directors in fulfilling its oversight responsibilities relating to (i) the
quality and integrity of our financial statements, reports and related information provided to stockholders, regulators and others,
(ii) our compliance with legal and regulatory requirements, (iii) the qualifications, independence and performance of our independent
registered public accounting firm, (iv) the internal control over financial reporting that management and the Board have established,
and (v) the audit, accounting and financial reporting processes generally. The Committee is also responsible for review and approval
of related-party transactions. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate
funding from the Company for, outside legal, accounting or other advisors as it deems necessary to carry out its duties. During
periods in which the Company does not have an active Audit Committee, the entire board performs the functions of the Audit Committee.
Audit Committee Financial Expert
The
Board has determined that it does not have an “audit committee financial expert” within the meaning of SEC rules.
Code of Ethics
The Company has adopted
a Code of Ethics applicable to its principal executive, financial and accounting officers and persons performing similar functions,
as well as all directors and employees of the Company. A copy of the Code of Ethics is filed as an exhibit to this report, and
posted on the Company’s website, creativelearningcorp.com. In addition, the Company will provide a copy of the Code of Ethics
to any shareholder who submits a written request in writing to our chief executive officer at Creative Learning Corp., 1637 S.
Main Street, Milpitas, CA 94035; e-mail: rwhiton@creativelearningcorp.com
Communication with the Board of Directors
Our stockholders
and other interested parties may send written communications directly to the Board or to specified individual directors, including
the Chairman or any other non-management directors, by sending such communications to our corporate headquarters. Such communications
will be reviewed by our outside legal counsel and, depending on the content, will be:
|
●
|
forwarded to the addressees or distributed at the next scheduled board meeting;
|
|
●
|
if they relate to financial or accounting matters, forwarded to the audit committee or distributed at the next scheduled audit committee meeting;
|
|
●
|
if they relate to executive officer compensation matters, forwarded to the compensation committee or discussed at the next scheduled compensation committee meeting;
|
|
●
|
if they relate to the recommendation of the nomination of an individual, forwarded to the full Board or discussed at the next scheduled Board meeting; or
|
|
●
|
if they relate to our operations, forwarded to the appropriate officers of our company, and the response or other handling of such communications reported to the Board at the next scheduled board meeting.
|
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of
the Exchange Act requires directors, executive officer and persons who beneficially own more than 10% of a registered class of
our equity securities to file with the SEC initial reports of ownership and reports or changes in ownership of such equity securities.
Such persons are also required to furnish us with copies of all Section 16(a) forms that they file. Based upon a review of the
copies of the forms furnished to us and written representations from certain reporting persons, we believe that, during the year
ended September 30, 2021, none of our executive officers, directors or beneficial owners of more than 10% of any class of registered
equity security failed to file on a timely basis any such report, except as follows:
|
●
|
On
January 22, 2021, April 6, 2021, May
10, 2021, August 11, 2021, and November
23, 2021, Blake Furlow, who beneficially
owns more than 10% of the Company’s
common stock, filed Form 4’s
that included sales of common stock
that were reported past the deadline
for reporting such sales on Form 4.
|
Item 11. Executive Compensation
The following identifies
the elements of compensation for the fiscal years 2021 and 2020 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 2021, (ii) our two most highly compensated executive officers other than the principal executive
officer who were serving as executive officers at September 30, 2021 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, 2021.
Based on our compensation
for the fiscal year ended September 30, 2021, Rod Whiton and Christopher Rego constitute our only “named executive officers”
pursuant to Item 402 of Regulation S-K.
Summary Compensation Table
|
|
|
|
|
|
Stock
|
|
All Other
|
|
|
|
|
Fiscal
|
|
|
|
Compensation
|
|
Compensation
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
(4)
|
|
(5)
|
|
Total
|
Rod K. Whiton (1)
|
|
|
2021
|
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100,000
|
|
President
|
|
|
2020
|
|
|
$
|
33,333
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Rego (2)
|
|
|
2021
|
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100,000
|
|
CEO
|
|
|
2020
|
|
|
$
|
40,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
1)
|
Rod K. Whiton has acted as our president from June 2, 2020 to September 30, 2021, and our Principal Executive Officer from August 4, 2020 to September 30, 2021.
|
2)
|
Christopher Rego has acted as president of one of our operating subsidiaries from February 5, 2020 to April 30, 2020, and CEO from May 1, 2020 to September 30, 2021. Mr. Rego was our Principal Executive Officer from May 1, 2020 to August 4, 2020.
|
The Company does
not provide its officers or employees with pension, stock appreciation rights, long-term incentive or other plans. The Company
does not have a defined benefit, pension, profit sharing plan but does offer a 401(k) plan. We did not grant any stock options
or stock appreciation rights to our named executive officers in the last fiscal year. We did not reprice any options or stock appreciation
rights during the last fiscal year. We did not waive or modify any specified performance target, goal or condition to payout with
respect to any amount included in any incentive plan compensation included in the summary compensation table.
Compensation Philosophy
The Board is responsible
for creating and reviewing the compensation of our executive officers, as well as overseeing our compensation and benefit plans
and policies and administering our equity incentive plans. We believe in providing a competitive total compensation package to
its executives through a combination of base salary, annual performance bonuses, and long-term equity awards. The executive compensation
program is designed to achieve the following objectives:
|
●
|
provide competitive compensation that will help attract, retain and reward qualified executives;
|
|
●
|
align executives’ interests with our success by making a portion of the executive’s compensation dependent upon corporate performance; and
|
|
●
|
align executives’ interests with the interests of stockholders by including long-term equity incentives.
|
The Board believes
that our executive compensation program should include annual and long-term components, including cash and equity-based compensation,
and should reward consistent performance that meets or exceeds expectations. The Board evaluates both performance and compensation
to make sure that the compensation provided to executives remains competitive relative to compensation paid by companies of similar
size and stage of development operating in the payment processing industry and taking into account our relative performance and
its own strategic objectives.
Outstanding Equity Awards
At Fiscal Year-End
None of the named
executive officers have any unvested equity awards or unexercised options in the Company as of September 30, 2021.
Employee Benefit Plans and Pension
Benefits
The Company does
not provide its officers or employees with pension, stock appreciation rights, long-term incentive or other plans. The Company
does not have a defined benefit, pension or profit-sharing plan.
The Company sponsors
a 401(k) plan, in which our named executive officers’ participate on the same basis as our other employees. Effective May
1, 2015, our Board approved a matching contribution of 100% on the first 4% of an employee’s compensation which is treated
as an elective deferral. During the years ended September 30, 2021 and 2020, the Company made contributions to this plan of approximately
$443 and $10,775, respectively.
Nonqualified Deferred Compensation
None of our NEOs
are covered by a deferred contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Director Compensation
The following table
details the total compensation earned by our non-employee directors during the year ended September 30, 2021.
Name
|
|
Fee Earned
or Paid in
Cash ($)(1)
|
|
Restricted
Stock
Awards
($)
|
|
All Other
Compensation
($)
|
|
Total
$
|
John Simento
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
R. Gary Zell, II
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
Excludes travel expense reimbursements.
|
Our
Board does not have a current compensation policy for its directors. However, we reimburse our directors for reasonable travel
and other related expenses.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The following table
sets forth, as of December 31, 2021, certain information concerning the beneficial ownership of our common stock by (i) each
person known by us to own beneficially five percent (5%) or more of the outstanding shares of each class, (ii) each of
our directors and named executive officers, and (iii) all of our executive officers and directors as a group.
The number of shares
beneficially owned by each 5% stockholder, director or executive officer is determined under the rules of the Securities &
Exchange Commission, or SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under
those rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment
power and also any shares that the individual or entity has the right to acquire within 60 days after March 25, 2020 through the
exercise of any stock option, warrant or other right, or the conversion of any security. Unless otherwise indicated, each person
or entity has sole voting and investment power (or shares such power with his or her spouse) with respect to the shares set forth
in the following table. The inclusion in the table below of any shares deemed beneficially owned does not constitute an admission
of beneficial ownership of those shares.
Name and Address of Beneficial Owner
|
|
Amount and Nature of Beneficial Ownership
|
|
Percent of Class (1)
|
5% Beneficial Owners:
|
|
|
|
|
|
|
|
|
Blake Furlow
2110 N. Westgate Drive
Boise, ID 83704
|
|
|
1,801,610
|
|
|
|
13.3
|
%
|
Michelle Cote (2)
1600 San Carlos St.
St. Augustine, FL 32080
|
|
|
1,420,000
|
|
|
|
10.5
|
%
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
Rod Whiton (3) (5)
|
|
|
1,299,035
|
|
|
|
9.6
|
%
|
Christopher Rego (4) (5)
|
|
|
666,250
|
|
|
|
4.9
|
%
|
John Simento (5)
|
|
|
—
|
|
|
|
—
|
%
|
R. Gary Zell, II (5)
|
|
|
—
|
|
|
|
—
|
%
|
All Officers and Directors as a Group
|
|
|
1,965,285
|
|
|
|
14.5
|
%
|
(1)
|
Based upon 13,525,838 shares of Common Stock issued and outstanding as of December 31, 2021.
|
|
|
(2)
|
All shares held by Cote Trading, LLC, an entity controlled by Ms. Cote.
|
|
|
(3)
|
Includes 6,067 shares held in UTMA accounts for Mr. Whiton’s children, over which Mr. Whiton has voting and dispositive power.
|
|
|
(4)
|
Includes 250,250 shares owned directly and 416,000 owned in joint tenancy with his spouse.
|
|
|
(5)
|
The address for the shareholder is c/o Creative Learning Corp., 1637 S. Main Street, Milpitas, CA 94035
|
EQUITY COMPENSATION
PLAN INFORMATION
The following table
provides information as of September 30, 2021 about the securities issued, or authorized for future issuance, under our equity
compensation plans.
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
|
Weighted-
average exercise price of
outstanding options, warrants
and rights
(b)
|
|
Number of
securities
remaining
available for
future issuance
(c)
|
Equity compensation plans approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2017 Options Grants
|
|
|
1,764,000
|
|
|
|
0.30
|
|
|
|
—
|
|
September 2017 Options Grants
|
|
|
118,793
|
|
|
|
0.18
|
|
|
|
—
|
|
March 2019 Options Grants
|
|
|
294,778
|
|
|
|
0.17
|
|
|
|
—
|
|
Total
|
|
|
2,177,571
|
|
|
|
0.23
|
|
|
|
—
|
|
Item 13. Certain Relationships and Related Transactions,
and Director Independence
On or about December
6, 2019, Christopher Rego and Rod Whiton (the “Solicitors”), prior to their appointments as officers or directors of
the Company, commenced a consent solicitation to the shareholders of the Company and on February 5, 2020, the Company and the Solicitors
entered into an agreement to settle their dispute over the consent solicitation. The settlement resulted in the Company paying
$10,000 as reimbursement for certain costs that they incurred related to the consent solicitation, the Company agreeing to appoint
Mr. Rego and Mr. Whiton to the board, and the Company’s agreeing to appoint Mr. Rego as chief executive officer, among other
provisions. The Company ultimately paid a total of $20,000 in costs incurred by Messrs. Rego and Whiton in relation to the consent
solicitation.
Bart Mitchell resigned
as President of the Company on June 8, 2020 at which time he received a severance package of $50,000. Additionally, during the
year ended September 30, 2020, Mr. Mitchell no longer wanted his 279,406 shares, therefore, he returned them to the Company for no
consideration and the Company cancelled them.
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 years ended September 30, 2021 and 2020, the Company recognized royalty revenues from the franchise of $6,750
and $16,650, respectively, recognized technology fee revenue from the franchise of $900 and $900, respectively, and recognized marketing
fee revenues from the franchise of $0 and $829, respectively. Total payments made by the franchisee were $7,650 and $8,581, respectively.
As of September 30, 2021 and 2020 the accounts receivable balance with the franchise was $1,897 and the Company had allowed for $1,334
and $1,116, respectively, for net AR balances of $563 and $781, respectively. Accordingly, during the year ended September 30, 2021 the
Company increased their allowance for Mr. Rego’s franchise accounts by $218. As of September 30, 2021 and 2020 the franchises had
deferred revenue balances of $0.
John Simento has
been a director of the Company since May 19, 2020. Prior to Mr. Rego’s and Mr. Simento’s appointments with the Company,
they purchased a Company franchise in the United Arab Emirates (the “UAE”). The Company filed an arbitration complaint
against them in December 2019 regarding issues related to opening the franchise. The complaint was resolved by a Settlement Agreement
dated February 5, 2020. Under the Settlement Agreement, the Company forgave all back royalty fees through July 2019, equaling $18,825,
and agreed to defer all other fees until the franchise was able to obtain a business license to operate in the UAE., which is currently
delayed due to the Coronavirus pandemic. The franchise is currently non-operational as a result of an inability to obtain the issuance
of a business license from the UAE due to the Coronavirus pandemic. If the franchise is not able to procure the necessary authorizations
to operate, the franchisees would not owe any franchise fees. As a consequence, we have not realized any revenue from the franchise
and no payments have been received on outstanding balances. As of September 30, 2021 and 2020 the accounts receivable balance with
the franchise was $10,613 and the Company had allowed for $10,613 and $8,925, respectively, for net AR balances of $0 and $1,688,
respectively. Accordingly, during the year ended September 30, 2021 the Company increased their allowance for the UAE franchise
account by $1,688.
Mr. Rego is also
the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10, 2020 to perform
development and maintenance services in relation to the Company’s franchise management software. The term of the agreement
was six months, subject to auto-renewal until Teknowland had completed its obligations under the agreement, but subject to each
party’s right to terminate the agreement at any time on 30 days’ notice. Under the agreement, the Company was obligated
to pay Teknowland a fee of $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. 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 the E-Learning
program developed by Teknowland for the Company. The Company evaluated the E-Learning program on a trial basis, and elected not
to pursue it as a line of business. The Company agreed to pay Teknowland $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 September 30, 2021 the entire amount had been paid.
During the year ended
September 30, 2021, JoyAnn Kenny-Charlton, a former director of the Company, agreed to relinquish 272,472 shares previously approved
for issuance to her for director services for no consideration.
On December 7, 2021,
the Company entered into a Sale Agreement with StroomX, LLC (the “Purchaser”), under which the Company agreed to sell
all of the Company’s subsidiaries (the “Learning Subsidiaries”) involved in its learning business (the “Learning
Business”), as well as any assets of the Learning Business that are not owned by the Learning Subsidiaries, to the Purchaser.
In connection with the sale, the Purchaser agreed to assume all liabilities of the Learning Business, and to indemnify and hold the Company harmless from any such liabilities.
The Purchaser is controlled by Christopher Rego, the Company’s current chief executive officer. Closing of the sale will
occur after the closing of the Share Exchange. An informal committee of independent directors determined that the sale price for
the Learning Business was fair under the circumstances. Among the factors considered by the informal committee were the lack of
any offers for the Learning Business generated from marketing the Learning Business in 2021, and the conclusions of a valuation
consultant engaged by the board to determine the fair market value of the Learning Business in 2021.
Director Independence
Our current Board
consists of Christopher Rego, Rod Whiton, John Simento and R. Gary Zell. Our common stock is currently quoted on the over the counter
market. Since the over the counter market does not have its own rules for director independence, we use the definition of independence
established by the NASDAQ Stock Market. Under applicable NASDAQ Stock Market rules, a director will only qualify as an “independent
director” if the director at any time in the past three years (a) was employed by us, (b) received more than $120,000 in
compensation from us, other than for board services, (c) had a family member who was employed as an executive officer of us, (d)
was, or had a family member that was, a partner, controlling shareholder or executive officer of any organization that received
payments for property or services that exceeded the greater of 5% of the recipient’s gross revenues or $200,000, (e) was,
or had a family member that was, employed as an executive officer of another entity during the past three years where any of the
executive officers of us serve on the compensation committee, or (f) was, or had a family member that was, a partner in our auditor
at any time in the past three years. At this time, we have determined that we have two independent directors: John Simento and
R. Gary Zell, II.
The Board does not
currently have any committees. The Board has approved the formation of an Audit Committee, and an Audit Committee charter, but
no members currently serve on the Audit Committee. The independent directors perform the functions of the Audit Committee.
Policies with Respect to Transactions
with Related Persons
The
Board has adopted a Code of Ethics, which is available at www.creativelearningcorp.com, that sets forth various policies and procedures
intended to promote the ethical behavior of the Company’s employees, officers and directors. The Code of Ethics describes
our policy on conflicts of interest.
The
executive officers and the Board are also required to complete a questionnaire on an annual basis which requires them to disclose
any related person transactions and potential conflicts of interest. The responses to these questionnaires are reviewed by outside
corporate counsel, and, if a transaction is reported by an independent director or executive officer, the questionnaire is submitted
to the Audit Committee, or the independent directors if there is no Audit Committee. If necessary, the Audit Committee or the independent
directors, as applicable, will determine whether the relationship is material and will have any effect on the director’s
independence. After making such determination, the Audit Committee or independent directors, as applicable, will report its recommendation
on whether the transaction should be approved or ratified by the entire Board.
Item 14. Principal Accountant Fees and Services.
The following table
presents fees for professional services provided by MAC Accounting Group LLP for the years September 30, 2021 and 2020, respectively:
The following table shows the fees billed
aggregate to the Company for the periods shown:
|
|
Fiscal Year
2021
|
|
Fiscal Year
2020
|
Audit Fees (1)
|
|
$
|
72,500
|
|
|
$
|
62,500
|
|
Audit-Related Fees (2)
|
|
|
—
|
|
|
|
—
|
|
Tax Fees (3)
|
|
|
—
|
|
|
|
—
|
|
All Other Fees (4)
|
|
|
—
|
|
|
|
—
|
|
Total Fees
|
|
$
|
72,500
|
|
|
$
|
62,500
|
|
(1)
|
Audit Fees. Audit services include work performed for the audit of our financial statements and the review of financial statements included in our quarterly reports, as well as work that is normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings.
|
(2)
|
Audit-related services. Audit-related services are for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not covered above under “audit services.”
|
(3)
|
Tax services. Tax services include all services performed by the independent registered public accounting firm’s tax personnel for tax compliance, tax advice and tax planning.
|
(4)
|
All other Fees. All other fees are those services and/or travel expenses not described in the other categories.
|
Audit fees represent
amounts invoiced for professional services rendered for the audit of the Company’s annual financial statements, including
the Form 10-K report, and the reviews of the quarter ending financial statements included in the Company’s Form 10-Q reports.
Pre-Approval Policy and Procedures
We have adopted an
Audit Committee charter, which contains policies and procedures which set forth the manner in which the Audit Committee will review
and approve all services to be provided by the independent auditor before the auditor is retained to provide such services. The
policy requires Audit Committee pre-approval of the terms and fees of the annual audit services engagement, as well as any changes
in terms and fees resulting from changes in audit scope or other items. The Audit Committee also pre-approves, on an annual basis,
other audit services, and audit-related and tax services set forth in the policy, subject to estimated fee levels, on a project
basis and aggregate annual basis, which have been pre-approved by the Audit Committee.
All other services
performed by the auditor that are not prohibited non-audit services under SEC or other regulatory authority rules must be separately
pre-approved by the Audit Committee. Amounts in excess of pre-approved limits for audit services, audit-related services and tax
services require separate pre-approval of the Audit Committee.
All of the services reflected in the above
table were approved by the Audit Committee. We have not engaged our auditor to perform any services other than audit services.
Since May 2020, we
have not had a separately constituted Audit Committee, and our independent board members have performed the duties of the Audit
Committee as described in the Audit Committee charter.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
Notes to Consolidated Financial Statements
September 30, 2021 and 2020
(1) Nature of Organization and
Summary of Significant Accounting Policies
Nature of Organization
Creative Learning
Corporation (“CLC”), formerly B2 Health, Inc., was incorporated March 8, 2006 in the State of Delaware. BFK Franchise
Company LLC (“BFK”) was formed in the State of Nevada on May 19, 2009. Effective July 2, 2010, CLC was acquired by
BFK in a transaction classified as a reverse acquisition. CLC concurrently changed its name from B2 Health, Inc. to Creative Learning
Corporation. During fiscal year 2020, BFK eLearning LLC was formed in the State of Delaware.
In addition to the
accounts of CLC and BFK, the accompanying consolidated financial statements include the accounts of CLC’s subsidiaries, BFK
Development Company LLC (“BFKD”), BFK eLearning LLC (“B4KEL”) and SF LLC (“Sew Fun Studios”).
In 2020, the Company decided to put on hold the Sew Fun Studios business.
The organizational
documents for BFK Development Company LLC, B4KEL and SF LLC do not specify a termination date. Each of the above listed LLCs has
a single member, controlled 100% by CLC.
Prior to July 20,
2021, the Company also owned a 49% non-controlling interest in Bricks4Schoolz, LLC, which was accounted for under the cost method.
On July 20, 2021, the Company acquired the remaining 51% interest in Bricks4Schoolz, LLC (“B4S”), which is now a wholly-owned
subsidiary. B4S had no operational activity in fiscal year 2021 and simply owns rights to proprietary software used by the Company.
CLC operates wholly-owned
subsidiaries BFK and SF under the trade names Bricks 4 Kidz® and Sew Fun Studios™ respectively, that offer children’s
enrichment and education franchises.
CLC and its wholly
owned subsidiaries BFK, BFKD, B4KEL, SF LLC, and B4S are hereinafter referred to collectively as the “Company”.
Basis of Presentation
The Company financial
statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the
United States of America (“GAAP”).
International franchise
fees vary and are set relative to the potential of the franchised territories. In addition, the Company awards master agreements
outside of the United States and Canada. The royalty structure is the same for both our US and International franchisees. Contracts
are structured such that the Company collects revenue from foreign franchises in US dollars. We do not have international subsidiaries.
The Company has multiple
franchise concepts, but all concepts are managed centrally as one segment and are reviewed by the Company in total. Accordingly,
decision-making regarding the Company’s overall operating performance and allocation of Company resources are assessed on
a consolidated basis. As such, the Company operates as one reporting segment.
Principles of Consolidation
The accompanying
consolidated financial statements include the accounts of CLC and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
The accompanying
financial statements do not include the accounts of Bricks4Schoolz, LLC prior to July 20, 2021, when it was a 49% owned entity
accounted for under the cost method.
Fiscal year
The Company operates
on a September 30 fiscal year-end.
Use of Estimates
The preparation of
financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates
and assumptions made by management include allowance for doubtful accounts, allowance for deferred tax assets, depreciation of
property and equipment, recoverability of long-lived assets and fair value of equity instruments. Actual results could differ from
those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Cash, Restricted Cash, and Cash
Equivalents
The Company considers
all highly liquid securities with original maturities of three months or less when acquired, to be cash equivalents. The Company
records restricted cash for marketing funds collected from the franchisees in excess of amounts spent for marketing. Per the franchise
agreements, a marketing fund of 2% of franchisees’ gross cash receipts is collected by the Company and held to be spent on
the promotion of the brand (see Note 9).
Amounts recorded
as cash, cash equivalents, and restricted cash in the statement of cash flows is as follows:
Schedule of Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2021
|
|
2020
|
Cash
|
|
$
|
349,923
|
|
|
$
|
427,659
|
|
Cash Equivalents
|
|
|
—
|
|
|
|
—
|
|
Restricted Cash
|
|
|
4,951
|
|
|
|
20,194
|
|
Total
|
|
$
|
354,874
|
|
|
$
|
447,853
|
|
The Company maintains
cash balances which at times exceed the federally insured limit of $250,000. The Company believes there is no significant risk
with respect to these deposits. The Company had no cash in excess of the federally insured limit at September 30, 2021 and September
30, 2020.
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, 2021 and 2020 are adequate, but actual
write-offs could exceed the recorded allowance. During the years ended September 30, 2021 and 2020 the balance in the allowance
for doubtful accounts was approximately $873,000 and $942,000, respectively.
Notes Receivable
Accounting Standards
Codification (“ASC”) 310, Receivables, provides guidance for receivables and notes that arise from credit sales, loans
or other transactions. Financing receivable includes loans and notes receivable. Originated loans we hold for which we have the
intent and ability to hold for the foreseeable future or to maturity (or payoff) are classified as held for investment. Financing
receivables held for investment are reported in our consolidated balance sheets at the outstanding principal balance adjusted for
any write -offs, allowance for loan losses, deferred fees or costs, and any unamortized premiums or discounts. Interest income
is accrued on outstanding principal as earned. Unamortized discounts and premiums are amortized using the interest method with
the amortization recognized as part of interest income in the consolidated statements of operations. During the years ended September
30, 2021 and 2020 the balance in the allowance for doubtful notes receivable was approximately $91,000 and $91,000, respectively.
Long-Lived Assets
The Company’s
long-lived assets currently consist of property and equipment, and 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.
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 Lifes
|
|
|
Property and Equipment
|
|
Useful Life
|
Equipment
|
|
5 years
|
Furniture and Fixtures
|
|
5 years
|
Property Improvements
|
|
15-40 years
|
Software
|
|
3 years
|
Intangible Asset
The Company records
intangible assets at cost and then amortizes the intangible asset over its useful life. Costs incurred to renew or extend the term
of any intangible assets will be expensed as incurred. During the year ended September 30, 2021 the Company acquired intellectual
property consisting of software and content for $168,000 (see Note 5). The intangible asset is being amortized over its useful
life of 5 years and the Company recognized $5,600 worth of amortization expense during the year ended September 30, 2021, which
resulted in an intangible asset balance of $162,400 as of September 30, 2021. Amortization expense of $33,600 is expected annually
through September 30, 2025 with amortization expense of $28,000 expected for the year ended September 30, 2026.
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.
Revenue Recognition
The Company generates
almost all of its revenue from contracts with customers. The Company’s franchise agreements enter the parties into a contractual
agreement, typically over a ten years term, and include performance obligations as follows: protected territory designation, access
to proprietary manuals and handbooks, initial training and on-going assistance, consulting, promotion of goodwill, administration
of marketing fund, marketing and promotion items, initial marketing program development assistance, company website access, Franchise
Management Tool access, lessons and model plans, project kits, Duplo bricks, frames stop motion animation software, and use of
the franchisor’s intellectual property (IP) (e.g., trade name – Bricks for Kidz). Upon entering into a franchise agreement,
the Company charges an initial franchise fee, which is fully collectible and nonrefundable as of the date of the signing of the
franchise agreement. Further, because the Company’s franchises are primarily a mobile concept and do not require finding
locations or construction, the franchisees can begin operations as soon as they complete training.
Per the terms of
the franchise agreements, the Company charges for royalty fees on a monthly basis, generally set at a fixed amount, but in some
cases are based on a percentage of franchisee’s monthly gross revenues. The Company also charges fees for a marketing fund,
generally based on 2% of franchisee’s monthly gross revenues, which is managed by the Company, to allocate towards national
branding of the Company’s concepts to benefit the franchisees. Lastly, the Company charges for technology fees on a monthly
basis, generally at a fixed amount, for the use of the company Franchise Management tool as well as company emails, etc.
The Company adopted
the new revenue standard (ASC 606) on October 1, 2018 for contracts with remaining performance obligations as of October 1, 2018.
The Company elected to apply the new standard retrospectively with an adjustment to the opening balance of retained earnings as
of the date of adoption. Under ASC 606, the Company considers initial franchise fees to be a part of the license of symbolic intellectual
property (“IP”), therefore the performance obligation related to these fees is satisfied over time as the Company fulfills
its promise to grant the customer rights to use, and benefit from, the Company’s IP, as well as support and maintain the
IP. The initial franchise fee, then, is recorded as deferred revenue at inception and recognized on a straight-line basis over
the contract term.
In accordance with
ASC 606-10-55-65, the Company has determined that the royalty fees, marketing fees, and technology fees are subject to a sales
and usage-based royalties’ constraint on licenses of IP. Accordingly, these fees are recognized as revenue at the later of
when the sales or usage occurs or the related performance obligation is satisfied. Technology fees are recorded net of processing
fees. Marketing fees are limited to marketing amounts expensed; therefore, the Company will recognize amounts received in excess
of amounts spent on the balance sheet in the accrued marketing fund liability.
The Company collects
transfer fees when contracts are transferred between parties and accounts for the transfer as a contract modification under ASC
606. Because the transfer does not increase the scope of the contract or promise any additional goods or services and there are
no new distinct services that will be provided after the transfer the Company considers the transfer fee part of the existing contract.
Transfer fees, then, are recorded as deferred revenue at inception and recognized on a straight-line basis over the remaining contract
term.
When contracts are
terminated due to default, or in conjunction with an early termination agreement, the Company accounts for the early termination
as a contract modification under ASC 606. Because the termination eliminates any future performance obligations of the Company
any deferred revenue associated with the terminated contract is recognized into revenue at the time of termination, along with
any early termination fees, in the initial franchise fee line on the Company’s Statement of Operations.
The Company generates
revenue from sales of merchandise where the performance obligation is met, and therefore revenue recognized, upon the delivery
of merchandise to the customer.
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 years ended September 30,
2021 and 2020 the activity in the deferred revenue account was as follows:
Summary of deferred revenue activity
|
|
|
|
|
Balance, September 30, 2019
|
|
$
|
4,368,146
|
|
Deferred revenue recognized upon adoption of ASC 606
|
|
|
—
|
|
Initial franchise fees collected
|
|
|
82,527
|
|
Revenue recognized into revenue
|
|
|
(1,237,994
|
)
|
Balance, September 30, 2020
|
|
|
3,212,679
|
|
Initial franchise fees collected for franchise renewals and deposits
|
|
|
14,015
|
|
Revenue recognized into revenue
|
|
|
(1,257,217
|
)
|
Balance, September 30, 2021
|
|
|
1,969,478
|
|
Current portion
|
|
|
(697,675
|
)
|
Deferred revenue, net of current portion
|
|
$
|
1,271,803
|
|
Amounts expected
to be recognized into revenue related to performance obligations that are unsatisfied (or partially unsatisfied) as of September
30, 2021 were as follows:
Summary of performance obligations
|
|
|
|
|
Year ended September 30, 2022
|
|
$
|
697,675
|
|
Year ended September 30, 2023
|
|
|
589,126
|
|
Year ended September 30, 2024
|
|
|
355,366
|
|
Year ended September 30, 2025
|
|
|
172,030
|
|
Year ended September 30, 2026 and thereafter
|
|
|
155,281
|
|
Total
|
|
$
|
1,969,478
|
|
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. During
the years ended September 30, 2020 and 2021 the activity in the accrued marketing fund liability account was as follows:
Summary of accrued marketing fund for advertising fund revenue accounts
|
|
|
|
|
Marketing fund liability (receivable), September 30, 2019
|
|
$
|
—
|
|
Marketing fund billings recognized into income
|
|
|
130,496
|
|
Marketing funds recognized into expense
|
|
|
(130,496
|
)
|
Marketing fund liability (receivable), September 30, 2020
|
|
|
—
|
|
Marketing fund billings recognized into income
|
|
|
—
|
|
Marketing funds recognized into expense
|
|
|
—
|
|
Marketing funds advanced by the Company
|
|
|
(23,886
|
)
|
Marketing fund liability (receivable), September 30, 2021
|
|
$
|
(23,886
|
)
|
Contract Asset – Prepaid
Commission Expense
In accordance with ASC 606 the costs related
to obtaining a contract are to be capitalized as long as the costs are recoverable and incremental. Effective October 1, 2019,
the date the Company adopted ASC 606, they capitalized the value of sales commissions as a contract asset and is amortizing those
costs straight-line over the contract life of the franchise agreement to which they relate. During the year ended September 30,
2020 and 2021 the activity in the contract asset account was as follows:
Summary of contract asset activity
|
|
|
|
|
Balance, September 30, 2019
|
|
$
|
1,008,191
|
|
Commissions paid
|
|
|
5,421
|
|
Commissions recognized into expense
|
|
|
(288,734
|
)
|
Balance, September 30, 2020
|
|
|
724,878
|
|
Commissions paid
|
|
|
—
|
|
Commissions recognized into expense
|
|
|
(298,389
|
)
|
Balance, September 30, 2021
|
|
|
426,489
|
|
Current portion
|
|
|
(162,817
|
)
|
Prepaid commission expense, net of current portion
|
|
$
|
263,672
|
|
General Advertising Costs
General Advertising
costs are expensed as incurred. The Company incurred general advertising costs for the years ended September 30, 2021 and 2020
of approximately $46,000 and $81,000, 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, 2021 and 2020, respectively, and has not recognized interest and/or penalties during
the years ended September 30, 2021 and 2020, respectively, since there are no material unrecognized tax benefits. Management believes
no material change to the amount of unrecognized tax benefits will occur within the next twelve months.
The tax years subject
to examination by major tax jurisdictions include the years 2017 and forward by the U.S. Internal Revenue Service, and the years
2016 and forward for various states.
Net earnings (loss) per share
Basic earnings (loss)
per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution that could occur if stock options or other contracts to issue common
stock were exercised or converted during the period. FASB ASC 260, Earnings per Share, requires a dual presentation
of basic and diluted earnings per share. Any stock options or warrants that would have anti-dilutive effect have been excluded
from the computation of earnings per share. The number of such shares excluded from the computations of diluted loss per share
totaled 1,795,562 at September 30, 2020 and 1,795,562 at September 30, 2021.
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
The Company has reviewed
all newly issued accounting pronouncements, including those that are not yet effective, and all have been deemed either immaterial
or not applicable.
(2) Liquidity
During the current
year, the Company had net income of approximately $325,000 324,902
and has sufficient cash on hand to cover expenses for the next 12 months, provided the Company only operates the Learning Business
for the next 12 months. However, the Company has entered into agreements to acquire DIA and dispose of the Learning Business (see
Note 12), and if those agreements are consummated the Company’s liquidity will be determined in reference to DIA’s
profitability and capital needs instead.
The COVID-19 outbreak
has been declared a pandemic by the World Health Organization, has spread to the United States and many other parts of the world
and has adversely affected our business operations, employee availability, financial condition, liquidity and cash flow and the
length of such impacts are uncertain.
The outbreak of COVID-19
continues to affect the United States and globally, and related government and private sector responsive actions have and will
continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19
pandemic as the situation continues to evolve.
The spread of COVID-19
has caused public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating
in heavily populated areas without masks, vaccinations and testing, such as malls and shopping centers. Among the precautions was
the cessation of in-person leaning at a substantial portion of the schools in the United States, which has adversely impacted our
royalty revenue from franchisees and our ability to sell new franchises. There is significant uncertainty around the breadth and
duration of these school closures and other business disruptions related to COVID-19, as well as its impact on the U.S. and global
economy. Many public schools resumed some or all in person learning in the Fall of 2021, but many have since reverted back to remote
learning with the advent of the Omicron strain of COVID-19 in December 2021. The extent to which COVID-19 impacts our results will
depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning
the severity of COVID-19 and the actions taken to contain it or treat its impact. We have asked some of our corporate employees
whose jobs allow them to work remotely to do so a few days a week for the foreseeable future. Such precautionary measures could
create operational challenges, as we adjust to a remote workforce, which could adversely impact our bustiness.
We had cash flows used
in operating activities of approximately $75,000 75,136
for the year ended September 30, 2021 compared to approximately $306,000
306,220 for the year ended September 30, 2020. The decrease in cash flows used in operating activities for the year ended September
30, 2021 compared to the year ended September 30, 2020 relates primarily to accounts receivable being collected as well as amounts
previously allowed for being recouped in the current year.
We had cash flows used
in investing activities of approximately $17,000
(17,843) for the year ended September 30, 2021 compared to cash flows provided by investing activities of approximately $94,000
94,072 for the year ended September 30, 2020. The decrease in cash flows provided by investing activities was primarily due to the
acquisition of intangible assets, as further described in Note 5 during the year ended September 30, 2021 as compared to the sale of
assets during the year ended September 30, 2020.
We had cash flows provided by financing
activities of $0
for the year ended September 30, 2021, compared to $120,000
119,980 for the year ended September 30, 2020. This was due to the Company receiving proceeds from a loan from the Small Business
Administration as further described in Note 11.
The Company is currently dependent upon
royalty and technology fee revenue from existing franchises to continue current business operations and liquidity, since new franchise
sales are currently minimal due to the impact of COVID-19 and other factors which make new sales difficult. While those revenue
sources are generally sufficient to enable to the Company to operate, as a result of challenges faced by the Company’s existing
business, in December 2021, its board elected to change the business focus of the Company by entering into the Share Exchange Agreement
to acquire DriveItAway, Inc. and a separate agreement to dispose of our learning business if the acquisition of DriveItAway, Inc.
closes. See Note 12.
(3) Related Party Transactions
On or about December
6, 2019, Christopher Rego and Rod Whiton (the “Solicitors”), prior to their appointments as officers or directors of
the Company, commenced a consent solicitation to the shareholders of the Company and on February 5, 2020, the Company and the Solicitors
entered into an agreement to settle their dispute over the consent solicitation. The settlement resulted in the Company paying
$10,000 as reimbursement for certain costs that they incurred related to the consent solicitation, the Company agreeing to appoint
Mr. Rego and Mr. Whiton to the board, and the Company’s agreeing to appoint Mr. Rego as chief executive officer, among other
provisions. The Company ultimately paid a total of $20,000 in costs incurred by Messrs. Rego and Whiton in relation to the consent
solicitation.
Bart Mitchell resigned
as President of the Company on June 8, 2020 at which time he received a severance package of $50,000. Additionally, during the
year ended September 30, 2020, Mr. Mitchell no longer wanted his 279,406 shares, therefore, he returned them to the Company for no
consideration and the Company cancelled them.
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 years ended September 30, 2021 and 2020, the Company recognized royalty
revenues from the franchise of $6,750
and $16,650,
respectively, recognized technology fee revenues from the franchise of $900 and $900, respectively, and recognized marketing fee
revenues from the franchise of $0
and $829,
respectively. Total payments made by the franchisee were $7,650
and $8,581,
respectively. As of September 30, 2021 and 2020 the accounts receivable balance with the franchise was $1,897
and $11,894,
respectively, and the Company had allowed for $1,334
and $11,113,
respectively, for net accounts receivable balances of $563
and $781,
respectively. Accordingly, during the year ended September 30, 2021 the Company increased its allowance for Mr. Rego’s
franchise accounts by $218.
As of September 30, 2021 and 2020 the franchises had deferred revenue balances of $0.
John Simento has
been a director of the Company since May 19, 2020. Prior to Mr. Rego’s and Mr. Simento’s appointments with the Company,
they purchased a Company franchise in the United Arab Emirates (the “UAE”). The Company filed an arbitration complaint
against them in December 2019 regarding issues related to opening the franchise. The complaint was resolved by a Settlement Agreement
dated February 5, 2020. Under the Settlement Agreement, the Company forgave all back royalty fees through July 2019, equaling $18,825,
and agreed to defer all other fees until the franchise was able to obtain a business license to operate in the UAE., which is currently
delayed due to the Coronavirus pandemic. The franchise is currently non-operational as a result of an inability to obtain the issuance
of a business license from the UAE due to the Coronavirus pandemic. If the franchise is not able to procure the necessary authorizations
to operate, the franchisees would not owe any franchise fees. As a consequence, we have not realized any revenue from the franchise
and no payments have been received on outstanding balances. As of September 30, 2021 and 2020 the accounts receivable balance with
the franchise was $10,613 and the Company had allowed for $10,613 and $8,925, respectively, for net AR balances of $0 and $1,688,
respectively. Accordingly, during the year ended September 30, 2021 the Company increased their allowance for the UAE franchise
account by $1,688.
Mr. Rego is also
the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10, 2020 to perform
development and maintenance services in relation to the Company’s franchise management software. The term of the agreement
was six months, subject to auto-renewal until Teknowland had completed its obligations under the agreement, but subject to each
party’s right to terminate the agreement at any time on 30 days’ notice. Under the agreement, the Company was obligated
to pay Teknowland a fee of $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. 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 the E-Learning
program developed by Teknowland for the Company. The Company evaluated the E-Learning program on a trial basis, and elected not
to pursue it as a line of business. The Company agreed to pay Teknowland $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 September 30, 2021 the entire amount had been paid.
During the year
ended September 30, 2021, JoyAnn Kenny-Charlton, a former director of the Company, agreed to relinquish 272,472 shares previously
approved for issuance to her for director services for no consideration.
(4) Property and Equipment
Property and equipment
consisted of the following:
Schedule of Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
Description
|
|
2021
|
|
2020
|
Depreciable Property and Equipment:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
79,260
|
|
|
$
|
76,434
|
|
Furniture and Fixtures
|
|
|
83,427
|
|
|
|
83,427
|
|
Software
|
|
|
418,899
|
|
|
|
418,570
|
|
Total Depreciable Property and Equipment
|
|
|
581,586
|
|
|
|
578,431
|
|
Accumulated Depreciation
|
|
|
(555,756
|
)
|
|
|
(446,813
|
)
|
Total Net Property and Equipment
|
|
$
|
25,830
|
|
|
$
|
131,618
|
|
Depreciation expense
totaled approximately $109,000 and $113,000, respectively, for the years ended September 30, 2021 and 2020.
(5) Acquisition of Intangible
Assets
Prior to July 20,
2021, the Company owned a 49% non-controlling interest in Bricks4Schoolz, LLC, which was accounted for under the cost method. On
July 21, 2021, the Company acquired the remaining 51% of Bricks4Schoolz, LLC, including the proprietary software and content developed
for the entity by the other joint venture party, in consideration for the issuance of 300,000 shares of common stock, valued at
$60,000 based on the market value of the shares on the agreement date, and an agreement to pay cash of $108,000 in twelve monthly
payments of $9,000 each. In accordance with ASC 805, Bricks4Schoolz, LLC was recorded as an asset acquisition because Bricks4Schoolz,
LLC did not meet the definition of a business, in that it only has a single asset (rights to proprietary software used in the Company’s
operations) and it does not have operations that include an input and a substantive process that together significantly contribute
to the ability to create outputs. Accordingly, the total purchase price of $168,000 was recorded as an intangible asset that is
being amortized over five years.
(6) Notes and Other Receivables
At September 30,
2021 and 2020, respectively, the Company held certain notes receivable totaling approximately $97,000 and $100,000 respectively
for extended payment terms of franchise fees. The Company had an allowance on notes receivable of $91,000 and $91,000 as of September
30, 2021 and 2020, respectively. The net notes receivable was approximately $6,000 and $9,000 and was included in the consolidated
balance sheet as of September 30, 2021 and 2020 respectively. The notes were generally non-interest-bearing notes with monthly
payments, payable within one year, or currently in default. Accordingly, the full balance was recorded as a current asset as of
September 30, 2021 and 2020.
(7) Accrued Liabilities
The Company had accrued liabilities at
September 30, 2021, and September 30, 2020 as follows:
Schedule of Accrued Liabilities
|
|
|
|
|
|
|
|
|
Accrued Liabilities
|
|
September 30,
2021
|
|
September 30,
2020
|
Accrued board compensation
|
|
$
|
—
|
|
|
$
|
5,000
|
|
Accrued compensation and payroll taxes
|
|
|
3,269
|
|
|
|
3,743
|
|
Accrued settlement agreements
|
|
|
224,000
|
|
|
|
—
|
|
Other accrued liabilities
|
|
|
19,478
|
|
|
|
—
|
|
Accrued Liabilities
|
|
$
|
246,747
|
|
|
$
|
8,743
|
|
(8) Stockholders’ Equity (Deficit)
As of September 30,
2021 the Company has 10,000,000 shares of Preferred Stock authorized with no shares issued and outstanding and has 50,000,000 shares
of Common Stock authorized with 13,540,938 shares issued and 13,525,838 shares outstanding.
During the year ended
September 30, 2021 the Company issued 150,000 shares of common stock for services to a consultant that was valued at $0.20 per
share, which was the market price of the Company’s shares on the grant date. The Company also issued 300,000 shares of common
stock to acquire intangible assets that were valued at $0.20 per share, which was the market price of the Company’s shares
on the grant date. During the year ended September 30, 2021, JoyAnn Kenny-Charlton, a former director of the Company, agreed to
relinquish 272,472 shares previously approved for issuance to her for director services for no consideration and the Company cancelled
those shares. The Company also reclassified 50,000 shares of common stock out of treasury due to the shares owed to them never
being returned by the holder.
During the year ended
September 30, 2020 the Company issued 35,714 shares of common stock for compensation to Gary Herman, who was a director at the
time of the issuance, valued at $0.07 per share, which approximated the market value of the Company’s stock on the grant
date. Also, during the year ended September 30, 2020, Mr. Mitchell, who was the Company’s president at the time, returned
279,406 shares of common stock previously issued to him for compensation for no consideration and the Company cancelled them.
The following table
represents option activity during the years ended September 30, 2021 and 2020:
Schedule of Stock Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Weighted
|
|
|
Number of
|
|
Average
Exercise
|
|
Remaining
Life
|
|
Average
Grant Date
|
|
|
Options
|
|
Price
|
|
(years)
|
|
Fair Value
|
Vested and Exercisable at September 30, 2019
|
|
|
2,177,571
|
|
|
$
|
0.26
|
|
|
|
2.89
|
|
|
$
|
0.15
|
|
Cancelled options
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Vested and Exercisable at September 30, 2020
|
|
|
2,177,571
|
|
|
$
|
0.27
|
|
|
|
1.89
|
|
|
$
|
0.15
|
|
Cancelled options
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Vested and Exercisable at September 30, 2021
|
|
|
2,177,571
|
|
|
$
|
0.27
|
|
|
|
0.89
|
|
|
$
|
0.15
|
|
The following table
represents all outstanding options as of September 30, 2020:
Schedule of Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
Expiration
|
|
Remaining
|
|
Grant Date
|
|
|
Options
|
|
Price
|
|
Date
|
|
Life (years)
|
|
Fair Value
|
Granted May 13, 2017
|
|
|
1,764,000
|
|
|
$
|
0.30
|
|
|
|
05/13/22
|
|
|
|
0.62
|
|
|
$
|
0.17
|
|
Granted September 30, 2017
|
|
|
118,793
|
|
|
$
|
0.18
|
|
|
|
09/30/22
|
|
|
|
1.00
|
|
|
$
|
0.13
|
|
Granted March 21, 2019
|
|
|
294,778
|
|
|
$
|
0.17
|
|
|
|
03/19/24
|
|
|
|
2.47
|
|
|
$
|
0.05
|
|
Vested and Exercisable at September 30, 2021
|
|
|
2,177,571
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
(9) 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 sought 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 had returned certain Company documents that they
have identified, but other issues remained. 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 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. 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 Company’s
complaint against Mr. Pappas and Franventures (Case No. CA 15-1076) was 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 May 22, 2021,
the Company, Brian Pappas, Christine Pappas and Franventures entered into an agreement under which the parties agreed to mutually
release all parties from any claims or causes of action that they have against the other, including without limitation any claims
asserted in Case No. CA 15-1076 and Case No. CA 16-236. The Company agreed to pay Brian Pappas and his assigns 60 consecutive,
monthly payments of $4,000 commencing on June 1, 2021 and continuing through June 1, 2026. As of September 30, 2021 the Company
had made four of the monthly payments and the unpaid balance of $224,000 has been recorded in the balance sheet under accrued liabilities.
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 agreed to 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.
(10) Income Taxes
The components of
the deferred tax assets at September 30, 2021 and September 30, 2020 were as follows:
Schedule of Components of Deferred Taxes
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for bad debt
|
|
$
|
(165,028
|
)
|
|
$
|
79,399
|
|
Charitable contributions
|
|
|
127
|
|
|
|
127
|
|
Stock-based compensation
|
|
|
87,675
|
|
|
|
87,675
|
|
Foreign tax credit
|
|
|
171,314
|
|
|
|
149,238
|
|
Net operating loss
|
|
|
895,972
|
|
|
|
463,512
|
|
Total gross deferred tax asset
|
|
|
990,060
|
|
|
|
779,951
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation timing difference
|
|
|
(44,081
|
)
|
|
|
(16,614
|
)
|
ASC 606 Adjustment
|
|
|
(797,356
|
)
|
|
|
(797,356
|
)
|
Total deferred tax liability
|
|
|
(841,437
|
)
|
|
|
(813,970
|
)
|
Gross net deferred tax asset
|
|
|
148,623
|
|
|
|
(34,019
|
)
|
Less: Valuation allowances
|
|
|
(148,623
|
)
|
|
|
34,019
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has recorded
various deferred tax assets and liabilities as reflected above. In assessing the ability to realize the deferred tax assets, management
considers, whether it is more likely than not, that some portion, or all of the deferred tax assets and liabilities will be realized.
The ultimate realization is dependent on generating sufficient taxable income in future years. The valuation allowance is equal
to 100% of the net deferred tax asset. Given recurring losses, the Company cannot conclude that it is more likely than not that
such assets will be realized, therefore a full valuation allowance has been recorded.
The components of
the provisions for income taxes for the fiscal years ended September 30, 2021 and 2020 are as follows:
Schedule of Components of Provision For Income Taxess
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Additional deferred tax related to book tax differences
|
|
|
(431,807
|
)
|
|
|
(179,955
|
)
|
Valuation allowance
|
|
|
431,807
|
|
|
|
179,955
|
|
Total tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
A reconciliation
of the provisions for income taxes for the fiscal years ended September 2021 and 2020 as compared to statutory rates is as follows:
Schedule of Reconciliation of Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Provision at statutory rates
|
|
$
|
(338,614
|
)
|
|
|
19.85
|
%
|
|
$
|
(141,072
|
)
|
|
|
19.85
|
%
|
State income tax, net of federal benefit
|
|
|
(93,846
|
)
|
|
|
5.50
|
%
|
|
|
(39,098
|
)
|
|
|
5.50
|
%
|
Penalties
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
Meals & entertainment
|
|
|
653
|
|
|
|
-0.04
|
%
|
|
|
215
|
|
|
|
-0.03
|
%
|
Stock-based compensation
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
Tax credits
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
Other tax differences
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
Change in rate
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
Valuation allowance on deferred tax assets
|
|
|
431,807
|
|
|
|
-25.31
|
%
|
|
|
179,955
|
|
|
|
-25.3
|
%
|
Total income tax provision
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
$
|
—
|
|
|
|
0.00
|
%
|
(11) Note Payable
On April 28, 2020,
the Company was granted a loan (the “Loan”) from First Bank of the Lake in aggregate amount of $119,980, pursuant to
the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27,
2020. The Loan, which was in the form of a Note dated April 24, 2020 issued by the Company, matures on April 23, 2022 and bears
interest at a rate of 1% per annum, payable monthly commencing on October 23, 2020. The Note may be prepaid by the Borrower at
any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, cost used to continue
group health care benefits, mortgage payments, rent, utilities and interest on other debt obligations incurred before February
15, 2020. The Company used the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan
may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company used the entire loan amount
for qualifying expenses, and expects the loan to be forgiven therefore has not recorded any accrued interest on the loan.
(12) Subsequent Events
On October 21, 2021,
the Company leased approximately 2,480 square feet of office space at 1637 S. Main Street, Milpitas, CA 94035 for its corporate
offices. The lease has a term of two years and one month. The Company is obligated to pay base rent of $4,588 per month in the
first year, $4,726 per month in the second year, and $4,867 per month in the last month, plus a pro rata share of common area expenses.
On November 1, 2021, the Company relocated its corporate offices to the Milpitas, California location.
On December 7, 2021,
the Company, DriveItAway, Inc., a Delaware corporation (“DIA”), and the existing shareholders of DIA executed an Agreement
and Plan of Share Exchange (the “Share Exchange Agreement”), under which the Company would acquire all of the issued
and outstanding common stock of DIA by issuing one share of Series A Convertible Preferred Stock (the “Series A Preferred”)
of the Company for each outstanding share of DIA common stock (the “Share Exchange”). As a result of the Share Exchange,
DIA will become a wholly-owned subsidiary of the Company. Each share of Series A Preferred will be convertible into that number
of shares of common stock of the Company which would entitle the Series A Preferred holders to 85% of the Company’s common
stock, determined on a fully-diluted basis, but prior to any shares issued or issuable as a result of the Financing (as defined
below). The exact conversion rate of the Series A Preferred will be determined at closing of the Share Exchange. In addition, each
share of Series A Preferred will be entitled to dividends and voting rights on an “as converted” basis with the common
stockholders. Upon closing of the Share Exchange, all of the existing members of the board of directors (the “Board”)
of the Company have agreed to resign, and John Possumato, Adam Potash and Paul Patrizio will be appointed to the Company’s
Board. Upon closing of the Share Exchange, Christopher Rego and Rod Whiton have agreed to resign as officers, and upon their resignation
John Possumato will be appointed chief executive officer and Adam Potash will be appointed chief operating officer. Mike Elkin
has agreed to remain as chief financial officer of the Company. Closing of the Share Exchange Agreement is subject to a number
of conditions, and is expected to occur in the first quarter of 2022, provided that the closing conditions are satisfied or waived.
DIA is the first
national dealer focused mobility platform that enables car dealers to sell more vehicles in a seamless way through eCommerce, with
its exclusive “Pay as You Go” app-based subscription program. DIA provides a comprehensive turn-key, solutions driven
program with proprietary mobile technology and driver app, insurance coverages and training to get dealerships up and running quickly
and profitably in emerging online sales opportunities. The company is planning to soon to expand its easy and transparent consumer
app ‘subscription to ownership’ platform to enable entry level consumers to drive and acquire new electric vehicles.
On December 7, 2021,
the Company entered into a Sale Agreement with StroomX, LLC (the “Purchaser”), under which the Company agreed to sell
all of the Company’s subsidiaries (the “Learning Subsidiaries”) involved in its learning business (the “Learning
Business”), as well as any assets of the Learning Business that are not owned by the Learning Subsidiaries, to the Purchaser.
In connection with the sale, the Purchaser agreed to assume all liabilities of the Learning Business, and to indemnify and hold the Company harmless from any such liabilities.
The Purchaser is controlled by Christopher Rego, the Company’s current Chief Executive Officer. Closing of the sale will
occur after the closing of the Share Exchange.