UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒     xQuarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period endedJune 30, 2018March 31, 2019

 

☐     ¨Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to __________

 

Commission File Number:000-52883

 

CREATIVE LEARNING CORPORATION

CREATIVE LEARNING CORPORATION

 (Exact(Exact name of registrant as specified in its charter)

 

Delaware 20-4456503
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

701 Market St., Suite 113
St. Augustine, FL 32095

(AddressSt. Augustine, FL 32095

 (Address of principal executive offices, including Zip Code)

 

(904) 824-3133

(904) 824-3133

(Issuer’s (Issuer’s telephone number, including area code)

 

(Former name or former address if changed since last report)

 

Indicate by check markCheck whether the registrantissuer (1) has filed all reports required to be filed by Sectionsection 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   xNo ☐o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   xNo  ☐ o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smallersmall reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer☐oAccelerated filer☐o
Non-accelerated filer☐xSmaller reporting company☒x
Emerging growth company☐o

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   oNo ☒x

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12,090,16113,354,261 shares of common stock as of July 30, 2018. December 5, 2019.

 


CREATIVE LEARNING CORPORATION

FORM 10Q

QuarterPeriod Ended June 30, 2018March 31, 2019

 

TABLE OF CONTENTS

  
Page
No.
 PART I 
   
Item 1.Financial Statements4
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1217
   
Item 3.Quantitative and Qualitative Disclosure About Market Risk1318
   
Item 4.Controls and Procedures1318
   
 PART II 
   
Item 1.Legal Proceedings1519
   
Item 1A.Risk Factors1519
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1519
   
Item 3.Defaults Upon Senior Securities1519
   
Item 4.Mine Safety Disclosures1519
   
Item 5.Other Information1519
   
Item 6.Exhibits20

 162 

 


Unless the context otherwise requires, when we use the words the “Company,” “Creative Learning,” “we,” “us,” “our” or “our Company” in this Form 10-Q, we are referring to Creative Learning Corporation, a Delaware corporation, and its subsidiaries.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Report” or the “Form 10-Q”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. You should read statements that contain these words carefully because they:

 

●·discuss future expectations;

●·contain projections of future results of operations or financial condition; or

●·state other “forward-looking” information.

 

We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed in this Form 10-Q and in our Form 10-K for the year ended September 30, 2018 provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in our forward-looking statements, including among other things:

 

●·the operating and financial results of and our relationships with our franchisees;

●·actions taken by our franchisees that may harm our business;

●·incidents that may impair the value of our brand;

●·our failure to successfully implement our growth strategy;

●·changing economic conditions;

●·our need for additional financing;

●·risks associated with our franchisees;

●·litigation and regulatory issues; and

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

 

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. 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-Q 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-Q could have a material adverse effect on us.

 


3

PART I

 

Item 1. Financial Statements

CREATIVE LEARNING CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

 

  June 30,
2018		  September 30,
2017		 
Assets      
Current Assets:        
Cash $38,348  $213,950 
Restricted cash (marketing fund)  77,765   118,337 
Accounts receivable, less allowance for doubtful accounts of approximately $409,000 and $262,000, respectively  477,079   356,830 
Prepaid expenses  17,948   73,337 
Notes receivable - current portion, less allowance for doubtful accounts of approximately $4,000 and $33,000, respectively  9,158   2,730 
Total Current Assets  620,298   765,184 
         
Notes receivable - net of current portion, less allowance for doubtful accounts of approximately $19,000 and $0, respectively  58,386   59,150 
Property and equipment, net of accumulated depreciation of approximately $278,000 and $240,000, respectively  339,276   260,094 
Intangible assets  23,300   23,300 
Deposits  1,425   15,053 
Total Assets $1,042,685  $1,122,781 
         
Liabilities and Stockholders’ Equity        
Current Liabilities:        
Accounts payable $182,610  $148,021 
Payroll accruals  16,603   17,950 
Accrued liabilities  20,172   135,727 
Accrued marketing fund  84,872   131,909 
Total Current Liabilities  304,257   433,607 
Commitments and Contingencies - Note 7        
Stockholders’ Equity:        
Creative Learning Corporation stockholders’ equity:        
Preferred stock, $.0001 par value; 10,000,000 shares authorized; None issued and outstanding  —   — 
Common stock, $.0001 par value; 50,000,000 shares authorized; 12,090,161 and 12,075,875 shares issued and outstanding, respectively  1,209   1,207 
Additional paid-in capital  2,897,283   2,895,285 
Treasury Stock, 65,100 shares (cost method)  (34,626)  (34,626)
Accumulated deficit  (2,125,438)  (2,172,692)
Total Stockholders’ Equity  738,428   689,174 
         
Total Liabilities and Stockholders’ Equity $1,042,685  $1,122,781 
  March 31, September 30,
   2019 (Unaudited)   2018 
Assets        
Current Assets:        
Cash $110,105  $80,693 
Restricted Cash (marketing fund)  26,223   22,505 
Accounts receivable, less allowance for doubtful accounts of approximately $852,000 and $938,000, respectively  365,154   194,835 
Prepaid commission expense  291,748   - 
Prepaid expense  5,945   29,725 
Assets held for sale  -   43,178 
Notes receivables - current portion, less allowance for doubtful accounts of approximately $91,000 and $91,000, respectively  12,000   11,955 
Total Current Assets  811,175   382,891 
         
Prepaid commission expense - net of current portion  1,354,285   - 
Notes receivables - net of current portion  -   3,045 
Property and equipment, net of accumulated depreciation of approximately $338,000 and $273,000, respectively  425,499   357,930 
Deposits  1,425   1,425 
Total Assets $2,592,384  $745,291 
         
Liabilities and Stockholders' Equity        
Current Liabilities:        
Accounts payable $83,634  $161,011 
Deferred revenue  1,096,450   - 
Accrued liabilities  14,751   14,605 
Accrued marketing fund  34,756   97,334 
Total Current Liabilities  1,229,591   272,950 
         
Deferred revenue - net of current portion  4,315,442   - 
Total Liabilities  5,545,033   272,950 
         
Commitments and Contingencies (Note 6)  -   - 
         
Stockholders' Equity (Deficit)        
Preferred stock, $.0001 par value; 10,000,000 shares authorized;        
-0- shares issued and outstanding  -   - 
Common stock, $.0001 par value; 50,000,000 shares authorized        
12,089,140 shares issued and 12,024,040 shares outstanding as of March 31, 2019        
12,075,875 shares issued and 12,010,775 shares outstanding as of September 30, 2018  1,209   1,207 
Additional paid in capital  2,897,283   2,897,285 
Treasury Stock 65,100 shares, at cost  (34,626)  (34,626)
Accumulated Deficit  (5,816,515)  (2,391,525)
Total Stockholders' Equity (Deficit)  (2,952,649)  472,341 
Total Liabilities and Stockholders' Equity  (Deficit) $2,592,384  $745,291 

 

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

 


4

CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Operations (Unaudited)

 

  For the Three Months Ended  For The Nine Months Ended 
  June 30,
2018		  June 30,
2017		  June 30,
2018		  June 30,
2017		 
Revenues:            
Initial franchise fees $65,060  $5,522  $159,269  $145,835 
Royalties fees  548,384   546,135   1,654,209   1,726,433 
Merchandise sales  4,603   —   9,376   60 
   618,047   551,657   1,822,854   1,872,328 
Operating expenses:                
Franchise consulting and commissions  18,350   18,995   49,153   129,855 
Franchise training and expenses  13,375   27,183   36,460   72,280 
Salaries and payroll taxes  174,100   170,229   524,975   513,030 
Stock-based compensation  —   311,718   2,000   311,718 
Advertising  16,200   1,050   21,503   22,969 
Professional fees & legal settlements  89,418   211,308   496,460   1,070,050 
Office expense  2,088   1,451   9,334   6,276 
Bad debt expense  80,468   42,662   282,856   146,093 
Depreciation  13,219   16,909   37,952   44,362 
Other general and administrative expenses  75,895   151,835   294,152   228,943 
Total operating expenses  483,113   953,340   1,754,845   2,545,576 
Income (Loss) from operations  134,934   (401,683)  68,009   (673,248)
                 
Other income (loss):                
Interest income - net  —   48   —   87 
Other income (loss)  (1,397)  3,176   (1,390)  18,410 
Total other income (loss)  (1,397)  3,224   (1,390)  18,497 
Income (Loss) before income taxes  133,537   (398,459)  66,619   (654,751)
                 
Provision for income taxes  (19,365)  (433,065)  (19,365)  (356,107)
Net income (loss) $114,172  $(831,524) $47,254  $(1,010,858)
                 
Net income (loss) per share                
Basic and diluted $0.01  $(0.07) $0.00  $(0.08)
Basic and diluted weighted average number of common shares outstanding  12,090,161   12,005,850   12,085,399   12,002,889 
  For the three months ended  For the six months ended 
  March 31,  March 31,  March 31,  March 31, 
  2019  2018  2019  2018 
             
REVENUES                
Royalties fees $477,607  $557,888  $1,035,203  $1,105,825 
Advertising fund revenue  36,835   -   582,038   - 
Initial franchise fees  485,025   45,309   1,229,697   94,209 
Merchandise sales  15,725   4,773   17,563   4,773 
TOTAL REVENUES  1,015,192   607,970   2,864,501   1,204,807 
                 
OPERATING EXPENSES                
Salaries and payroll taxes and stock-based compensation  168,299   164,391   376,247   352,875 
Professional, legal and consulting fees  125,654   130,030   249,925   407,042 
Bad debt expense  21,899   132,529   27,058   202,388 
Other general and administrative expenses  68,280   101,783   132,547   218,257 
Franchise commissions  240,373   15,245   441,773   30,803 
Franchise training and expenses  2,461   6,583   15,322   23,085 
Depreciation  34,854   12,418   55,172   24,733 
Advertising  38,270   2,546   590,579   5,303 
Office expense  5,209   3,537   8,711   7,246 
TOTAL OPERATING EXPENSES  705,299   569,062   1,897,334   1,271,732 
                 
OPERATING INCOME/(LOSS)  309,893   38,908   967,167   (66,925)
                 
OTHER INCOME/ (LOSS)  252   (172)  41,518   7 
                 
INCOME/(LOSS) BEFORE INCOME TAXES  310,145   38,736   1,008,685   (66,918)
                 
PROVISION FOR INCOME TAXES  -   -   -   - 
                 
NET INCOME/(LOSS) $310,145  $38,736  $1,008,685  $(66,918)
                 
NET INCOME/(LOSS) PER SHARE                
Basic and diluted $0.03  $0.00  $0.08  $(0.01)
Basic and diluted weighted average number of common shares outstanding  12,011,520   12,090,161   12,011,141   12,083,018 

 

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

 


5

CREATIVE LEARNING CORPORATION
Creative Learning Corporation

Condensed Consolidated StatementsStatement of Cash Flows Changes in Stockholders' Equity (Deficit)

(Unaudited)

 

  For the Nine Months Ended 
  June 30,
2018		  June 30,
2017		 
Cash flows from operating activities:        
Net income (loss) $47,254  $(1,010,858)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:        
Depreciation  37,952   44,362 
Bad debt expense  282,856   146,093 
Deferred income taxes  —   343,444 
Stock issued for LOC option  2,000   — 
Stock based directors’ fees  —   295,926 
Stock based compensation  —   15,792 
Impairment loss on intangible assets  —   77,204 
Changes in operating assets and liabilities:        
Restricted cash  40,572   16,131 
Accounts receivable  (400,130)  (211,052)
Prepaid expenses  55,389   (89,515)
Notes receivable  (8,639)  6,991 
Deposits  13,628   (8,550)
Accounts payable  34,589   26,244 
Accrued liabilities  (115,555)  (229,997)
Unearned revenue  —   (188)
Payroll accruals  (1,347)  (1,600)
Accrued marketing  (47,037)  35,694 
Income tax receivable  —   424,938 
Net cash used in operating activities  (58,468)  (118,941)
Cash flows from investing activities:        
Acquisition of property and equipment  (117,134)  (1,080)
Net cash used in investing activities  (117,134)  (1,080)
Net change in cash  (175,602)  (120,021)
Cash, beginning of period  213,950   276,685 
Cash, end of period $38,348  $156,664 

For the three months ended March 31, 2019

  Treasury Stock  Common stock  Additional     Total 
              Paid-in  Accumulated  Stockholder's 
  Shares  Value  Shares  Amount  Capital  Deficit  Equity (Deficit) 
                      
Balance, December 31, 2018  (65,100) $(34,626)  12,075,875  $1,207  $2,897,285  $(6,126,660) $(3,262,794)
                             
Shares issued for rounding error  -   -   13,265   2   (2)  -   - 
                             
Net income  -   -   -   -   -   310,145   310,145 
                             
Balance, March 31, 2019  (65,100) $(34,626)  12,089,140  $1,209  $2,897,283  $(5,816,515) $(2,952,649)

For the six months ended March 31, 2019

  Treasury Stock  Common stock  Additional     Total 
              Paid-in  Accumulated  Stockholder's 
  Shares  Value  Shares  Amount  Capital  Deficit  Equity (Deficit) 
                      
Balance, September 30, 2018  (65,100)  (34,626)  12,075,875   1,207   2,897,285   (2,391,525)  472,341 
                             
Shares issued for rounding error  -   -   13,265   2   (2)  -   - 
                             
Net income  -   -   -   -   -   1,008,685   1,008,685 
                             
Adoption of ASC 606  -   -   -   -   -   (4,433,675)  (4,433,675)
                             
Balance, March 31, 2019  (65,100) $(34,626)  12,089,140  $1,209  $2,897,283  $(5,816,515) $(2,952,649)

For the three months ended March 31, 2018

  Treasury Stock  Common stock  Additional     Total 
              Paid-in  Accumulated  Stockholder's 
  Shares  Value  Shares  Amount  Capital  Deficit  Equity (Deficit) 
                      
Balance December 31, 2017  (65,100)  (34,626)  12,075,875   1,207   2,897,285   (2,278,346)  585,520 
                             
Net income  -   -   -   -   -   38,736   38,736 
                             
Balance, March 31, 2018  (65,100) $(34,626)  12,075,875  $1,207  $2,897,285  $(2,239,610) $624,256 

For the six months ended March 31, 2018

  Treasury Stock  Common stock  Additional     Total 
              Paid-in  Accumulated  Stockholder's 
  Shares  Value  Shares  Amount  Capital  Deficit  Equity (Deficit) 
                      
Balance September 30, 2017  (65,100)  (34,626)  12,075,875   1,207   2,895,285   (2,172,692)  689,174 
                             
Net loss  -   -   -   -   -   (66,918)  (66,918)
                             
Stock-based compensation  -   -   -   -   2,000   -   2,000 
                             
Balance, March 31, 2018  (65,100) $(34,626)  12,075,875  $1,207  $2,897,285  $(2,239,610) $624,256 

 

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

 


6

CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

  For the six months ended 
  March 31 
  2019  2018 
       
Cash flows from operating activities:        
Net Income/(Loss) $1,008,685  $(66,918)
Retained earnings adjustment for 606  (4,433,675)  - 
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:        
Depreciation  55,172   24,733 
Gain on sale of assets held for sale  (42,775)  - 
Bad debt expense  5,159   202,388 
Stock based compensation  -   2,000 
Changes in operating assets and liabilities:        
Accounts receivable  (175,478)  (267,479)
Prepaid expenses  27,508   40,885 
Prepaid commission expense  (1,646,033)  - 
Deposits  -   13,628 
Accounts payable  (81,105)  38,222 
Accrued liabilities  146   (46,477)
Deferred Revenue  5,411,892   - 
Accrued marketing fund  (62,578)  (31,913)
Net cash provided by (used in) operating activities  66,918   (90,931)
         
Cash flows from investing activities:        
Acquisition of property and equipment  (122,575)  (72,870)
Sale of assets held for sale  85,787   - 
(Issuance)/Collection of Notes receivable  3,000   (8,640)
Net cash provided by (used in) investing activities  (33,788)  (81,510)
         
Cash flows from financing activities:        
Net cash provided by financing activities  -   - 
Net change in cash, cash equivalents and restricted cash  33,130   (172,441)
Cash, cash equivalents and restricted cash at beginning of period  103,198   332,287 
Cash, cash equivalents and restricted cash at end of period $136,328  $159,846 
         
Noncash financing activity:        
Financed Insurance $3,728  $- 
Shares issued for rounding error $2  $- 

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

7

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

(1) Nature of Organization, Operations and Summary of Significant Accounting Policies:

 

Nature of Organization

 

Creative Learning Corporation (the “Company”) operates wholly owned subsidiaries, BFK Franchise Co., LLC (“BFK”) and SF Franchise Company, LLC (“SF”), under the trade names Bricks 4 Kidz® and Sew Fun Studios™ respectively, that offer children’schildren's enrichment and education franchises. As of June 30, 2018,March 31, 2019, BFK franchisees operated in 643391 territories in 40 states and 46 countries, and SF franchisees operated in 4 territories in 2 states and 1 country.38 countries.

 

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s results for the interim periods that have been included. The results for the ninethree and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s audited consolidated financial statements and management’s discussion and analysis included in the Company’s annual report on Form 10-K for the year ended September 30, 2017.2018.

Related Parties

The Company has been involved in transactions with related parties. A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

 

Use of Estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions made by management include the allowance for doubtful accounts, the valuation allowance for deferred tax assets, depreciation of property and equipment, amortization of intangible assets, recoverability of long-lived assets and fair market value of equity instruments. Actual results could differ from those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.

Restricted Cash

 

The Company had restricted cash of approximately $78,000$26,000 and $118,000$23,000 at June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively, associated with marketing funds collected from the franchisees. Per the franchise agreements a marketing fund of 2% of franchisees’franchisees gross cash receipts is collected and held to be spent on the promotion of the brand (seebrand. Any cash collected by the Company for marketing funds is held in a separate bank account and any balance at period end is presented as “restricted cash” and “accrued marketing fund” on the balance sheet. See Note 4).4 for additional information.

 

8

Accounts and Notes ReceivableNote Receivables

 

The Company reviews accounts and notes receivable periodically for collectability, establishes an allowance for doubtful accounts, and records bad debt expense when deemed necessary. The Company records an allowance for doubtful accounts and notes that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Receivables and notes are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts at June 30, 2018March 31, 2019 and September 30, 20172018 are adequate, but actual write-offs could exceed the recorded allowance.

 


Property, Equipment and Depreciation

 

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, which range from three to forty years. Expenditures for additions and improvements are capitalized, while repairs and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is recorded in the year of disposal.

 

Fixed AssetsUseful Life
Equipment5 years
Furniture and Fixtures5 years
Property and Improvements15-40 years
Software3  years

Long-Lived Assets

 

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

Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value because of the relative short-term maturity of these items and current payment expected. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The Company does not hold or issue financial instruments for trading purposes, nor does it utilize derivative instruments. Notes receivable are recorded at par value less allowance for doubtful accounts. The carrying amount is consistent with fair value based upon similar notes issued to other franchisees.

ASC 825, Financial Instruments, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

Level 1:Quoted prices in active markets for identical assets or liabilities.
Level 2:Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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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

 

Revenue is recognized onwhen a company satisfies a performance obligation by transferring a promised good or service to a customer. The Company generates all its revenue from contracts with customers. The Company’s franchise agreements provide for a ten year 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 advertising 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). Additionally, the contract permits the franchisee to renew the contract for an accrual basis after services have been performed under contract terms and in accordance with regulatory requirements,additional ten-year term for a fee. The following is a description of principal activities from which the service price to the client is fixed or determinable, and collectability is reasonably assured.Company generates its revenue.

 

Initial Franchise Fee - Since the Company’s franchises are primarily a mobile concept and do not require finding locations or construction, the franchisees can begin operations as soon as they complete training. The Initial Franchise Feesfranchise fees are fully collectible and nonrefundable as of the date of the signing of the franchise agreement, butagreement. The initial franchise fee is recognized as deferred revenue on a straight line basis over the ten-year period as the performance obligations are met over the contract term. The Company adopted the new revenue standard (Topic 606) on October 1, 2018 for contracts with remaining performance obligations as of October 1, 2018. Comparative information from prior year periods has not been adjusted and continue to be reported under the accounting standards in effect for those periods under Topic 605. The adoption of the new guidance changed the timing of recognition of franchise sales and franchise renewal revenue and related commissions paid on franchise sales, as discussed further in Note 7.

The activity in the Company’s deferred revenue for initial franchise fee is included in “Deferred revenue” and “Deferred revenue, net of current portion” on the Condensed Consolidated Balance Sheets, and consists of the following:

  Balance at
beginning of
period		 New billings
(a)		  Revenue recognized (b)  Balance at end of
period		 
As of March 31, 2019 - $6,641,589  $(1,229,697) $5,411,892 

(a)New billings not related to ASC 606 implementation was $15,368 and $130,468 for the three and six month periods ended March 31, 2019, respectively.

(b)Revenue recognized not related to ASC 606 implementation for new billings was $576 and $6,189 for the three and six month periods ended March 31, 2019, respectively.

Commissions paid on initial franchise sales are recognized as an asset and amortized over the contract life of the franchise fees are not recognized as revenue until initial training has been completed and when substantially allagreement. The activity in the Company’s capitalized contract costs for commissions consist of the services required byfollowing:

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  Balance at
beginning of
period		 Additions to
 Contract cost for
new activity (a)		  Expense recognized (b)  Balance at end of
period		 
As of March 31, 2019 - $2,087,806  $(441,773) $1,646,033 

(a)Additions to contract cost for new activity not related to ASC 606 implementation was $1,378 and $11,737 for the three and six month periods ended March 31, 2019, respectively.

(b)Expense recognized not related to ASC 606 implementation for new activity was $23 and $535 for the three and six month periods ended March 31, 2019, respectively.

Advertising Fund Revenue - Per the terms of the franchise agreement have been fulfilledagreements, the Company collects 2% of franchisee’s monthly gross revenues each month, due on the third day of the following month, for a marketing fund, managed by the Company, in accordance withto allocate towards national branding of the Company’s concepts to benefit the franchisees. This revenue is recognized on a monthly basis. Upon adoption of FASB 606 on October 1, 2018, the Company began presenting these revenues on a gross revenue basis on its statement of operations as per FASB ASC Topic 952-605Revenue Recognition-Franchisor.606-10-55-39.

 

As described under Recent account pronouncements below,The activity in the adoptionCompany’s accrued marketing fund for advertising fund revenue accounts consists of Topic 606 will have a significant impact on the recognition of revenue with repect to franchise sales.following:

  Balance at
beginning of
period		  New billings
(a)		  Expense recognized (b)  Balance at end of
period		 
As of March 31, 2019 $97,334  $517,013  $(579,591) $34,756 

(a)New billings recognized related to the beginning balance was $514 and $4,702 for the three and six month periods ended March 31, 2019 not related to ASC 606 implementation.

(b)Expense recognized related to the beginning balance was $36,835 and $67,279 for the three and six month periods ended March 31, 2019 not related to ASC 606 implementation.

 

Royalties - Royalties are calculated per franchise, based on a flat fee structure and are recognized as earned on a monthly basis.

 

Merchandise Revenue – Merchandise revenue is made up of Lego kits and fees for the use of Company email.

Advertising Costs

 

Advertising costs for the operating company are expensed as incurred. The Company incurred advertising costs for the quartersthree and six months ended June 30, 2018 and 2017March 31, 2019 of approximately $16,000$1,000 and $1,000,$9,000, respectively, and for the three and six months ended March 31, 2018 of approximately $3,000 and $5,000, respectively. Advertising costs of approximately $580,000 were paid out of the marketing fund on behalf of the franchisees and were expensed when funds were received from franchisees. See Note 7.

Income Taxes

 

The provision for income taxes and deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized. Given previous recurring losses, the Company cannot conclude that it is more likely than not that such assets will be realized, therefore a full valuation allowance has been recorded during the six months ended March 31, 2019.

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The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.

 

When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained with the ultimate realization being dependent on generating sufficient taxable income in future years. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows.

 


The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively, and has not recognized interest and/or penalties during the threesix months ended June 30,March 31, 2018, 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 2014 and forward by the U.S. Internal Revenue Service.

Net earnings (loss) per share

 

Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation. All securities outstanding as of March 31, 2019 are anti-dilutive.

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.

Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued Accounting Standards Update No.(“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”Topic 606”), and has since issued various amendments which amendsprovide additional clarification and implementation guidance on Topic 606. This guidance establishes principles for recognizing revenue upon the existing accounting standardstransfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for revenue recognition.those goods or services. The Company adopted this new guidance effective the first day of fiscal 2018 using the modified retrospective transition method and applied Topic 606 is based on principles that govern the recognitionto those contracts which were not completed as of revenue at an amount an entity expects to be entitled when products are transferred to customers. Topic 606 is required to be adopted by the Company on October 1, 2018. Early adoption is permitted.

The Company is currently evaluatingrecognized the impactcumulative effect of adoptinginitially applying the new revenue standard onas an adjustment to the opening balance of accumulated deficit at the beginning of fiscal 2018. In performing its consolidated financial statements. Under the prior revenue recognition rules,analysis, the Company generally recorded revenuereflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price.  Comparative information from prior year periods has not been adjusted and continue to be reported under the accounting standards in effect for initial franchise sales up front upon the completionthose periods under “Revenue Recognition” (“Topic 605”). Refer to Note 7 for further disclosure of the sale transaction and corresponding training obligations. Under Topic 606, franchise sales revenue is generally deferred and recognized over the lifeimpact of the franchise agreement as there is an ongoing obligation of the company to perform under the agreement. Accordingly, the Company expects a significant impact upon adoption as prior franchise sales which had previously been recognized up front will need to be recast as deferred over the remaining life of the agreements from the adoption date. The recognition of royalty revenue is not expected to change under Topic 606. The Company’s initial calculations in regard to the change in revenue recognition would create a deferred liability of approximately $7MM to $10MM with recognition of this deferred revenue of $80,000 to $250,000 per month depending on the activity during the period.new guidance.

 

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In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)”. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 becomes effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact ASU 2016-18 will have on its consolidated financial statements.


In February 2016, the FASB issued ASU No. 2016-02, “Leases““Leases”, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. The new standard will become effective for the Company beginning with the first quarter 2020 and requires a modified retrospective transition approach includingand includes a number of practical expedients. Early adoption of the standard is permitted. The Company is currently evaluating the impact the adoption of this accounting guidance will have on the consolidated financial statements.

 

In June 2018,November 2016, the FASB issued ASU 2018-07, Compensation – Stock CompensationNo. 2016-18, Statement of Cash Flows (Topic 718)230): Restricted Cash (“ASU 2016-18”), Improvements to Nonemployee Share-Based Payment Accounting. This update expandswhich requires that entities show the scopechanges in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of Topic 718 to include share-based payment transactions for acquiring goodscash flows. We adopted ASU 2016-18 on October 1, 2018, and services from nonemployees, aligning them to the accounting required for share-based payments awards issued to employees. ASU 2018-07 becomes effective for fiscal years beginning after December 15, 2018. Earlysuch adoption is permitted, but no earlier than an entity’s adoption date of ASU 2014-09. The Company is currently evaluating thedid not have a material impact the adoption of this accounting guidance will have on the consolidatedour financial statements.

 

(2) Related Party

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management, and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Transactions

 

On December 29th and 31st, 2017, the Company entered into two separate line of credit agreements in the amount of $50,000 each with two members of the Company’s Board of Directors. These agreements were intended to provide liquidity in the event the Company needed access to such. The agreements are payable upon demand, have an initial term of 5 years and bear interest at market rates. As of June 30, 2018,March 31, 2019, no amounts were outstanding on these lines of credit.

 

The Company has formed a not-for-profit entity, Bricks 4 Kidz, Inc., which was approved for 501(c)(3) designation during the quarter ended March 31, 2018. The entity will provide specialized educational programs and training support to underserved communities to teach the fundamentals of S.T.E.M. (science, technology, engineering and math) education for the benefit of school age children and teachers. This entity may allow our franchisees to have greater outreach in their communities. The management of Bricks 4 Kidz, Inc. is the same as the Company management, though Bricks 4 Kidz, Inc. and the Company have different Directors. The Company paid approximately $7,000 in costs and fees related to the formation of Bricks 4 Kidz, Inc.

(3) Notes and Other Receivables

At June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively, the Company held certain notes receivable totaling approximately $91,000$12,000 and $95,000,$15,000 respectively, net of allowances, for extended payment terms of franchise fees. The Company only writes off franchisees’ receivables in the event that they leave the network. In addition, thenotes receivable are non-interest bearing with monthly payments, payable within one year. The Company analyzes the collectability of all receivables and reserves accordingly.

  2018  2019  2020  2021  2022  Thereafter  Total 
Payment schedules for Notes Receivable $7,304  $11,301  $15,685  $15,370  $15,571  $25,953  $91,184 

(4) Accrued Marketing Fund

 

Per the terms of the franchise agreements, the Company collects 2% of a franchisee’s gross revenues for a marketing fund, managed by the Company, to allocate towards national branding of the Company’s concepts to benefit the franchisees.

 

TheAll marketing fund amounts arefees net of expenses were accounted for as a liability on the balance sheet andprior to adoption of FASB ASC 606 on October 1, 2018. Upon adoption of FASB 606 on October 1, 2018, the actual collectionsCompany presents these revenues on a gross revenue basis on its statement of operations. Any unused funds at the end of the period are deposited into a marketing fund bank account. Expenses pertaining to the marketing fund activities are paid from the marketing fund and reduce the liability account.

At June 30, 2018 and September 30, 2017, therecorded as accrued marketing fund liability balances were approximately $85,000 and $132,000, respectively.fees (see Note 7).

 

(5) Accrued Liabilities

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

Accrued Liabilities June 30,
2018		  September 30,
2017		 
Accrued Legal Fees  18,418   77,719 
Accrued Legal Settlements  —   32,143 
Accrued Exit Agreement  —   9,739 
Accrued Other  1,754   16,126 
  $20,172  $135,727 

(6) Stock-Based Compensation

 

On December 29thand 31st, 2017, the Company issued an aggregate ofgranted 14,286 shares of Common Stockwarrants to two Directors and Officers of the Company. These shareswarrants were issued in conjunction with the issuance of lines of credit from the two directors. The fair value of the shareswarrants on the date of grant were $2,000 and the shares vested immediately. The Company expensed $2,000 in connection with the grant during the quarter ended December 31, 2017. No stock-based compensation was granted during the six months ended March 31, 2019.

 

(7)On March 27, 2019, the Company issued 13,265 shares of common stock to the former President of the Company due to a rounding error in shares related to her terminated employment agreement. All equity compensation relating to this agreement was properly fully recognized during the year ended September 30, 2017.

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(6) Commitments and Contingencies

 

Lease Commitments

 

Rent expense was approximately $5,000$9,000 and $3,000, respectively,$20,000, for the three and six months ended June 30, 2018March 31, 2019, respectively, and 2017,approximately $5,000 and $14,000 and $12,000, respectively,$9,000 for the ninethree and six months ended June 30,March 31, 2018, and 2017.respectively. There are no lease commitments with terms greater than one year.

 

Litigation

 

Except as disclosedThe Company is subject to litigation claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters in accordance with the requirements of GAAP. The Company records litigation accruals for legal matters which are both probable and estimable and for related legal costs as incurred. The Company does not reduce these liabilities for potential insurance or third-party recoveries.

On October 2, 2015, the Company filed suit in the state court in St. John’s County, Florida, Case No. CA 15-1076, against its former Chief Executive Officer Brian Pappas, Christine Pappas, its former Human Resources officer, and an independent company controlled by Mr. Pappas named Franventures, LLC (“Franventures”). The lawsuit seeks return of company emails and other electronic materials in the possession of the defendants, company control over the process by which the company’s documents are identified, and a court judgment that the property is the Company’s. Mr. and Mrs. Pappas have returned certain company documents that they have identified, but other issues remain. On December 11, 2017, Brian Pappas filed a counterclaim alleging the Company is required to indemnify him for a multitude of matters. The Company denies the allegation and is actively litigating this matter.

In a separate suit, filed on March 7, 2016 in the state court in St. John’s County, Florida (Case No. CA 16-236), Franventures, LLC (“FV”) alleged that it is due an unstated amount of money from the Company pursuant to a contract the Company had previously terminated. On June 23, 2016, the Company filed a counterclaim against Franventures, which also included a complaint against former Chairman of the Board and Chief Executive Officer Brian Pappas. The counterclaim seeks redress for losses and expenditures caused by alleged fraud, conversion of company assets, and breaches of fiduciary duty that the Company alleges that defendants perpetrated upon CLC, including assertions regarding actions by Brian Pappas that the Company alleges occurred while Mr. Pappas was serving as the Chief Executive Officer of CLC and as a member of its board of directors. This case is being actively litigated by the Company.

On October 27, 2016, Brian Pappas filed a motion to amend the complaint to add a claim alleging that the Company slandered him by virtue of a press release issued on or about August 1, 2016, in which the Company reported to shareholders on steps it had taken and improvements it had implemented. The motion has still not been ruled upon by the Court. If Mr. Pappas does amend his complaint, the Company will vigorously defend the proposed claim.

On February 24, 2017, franchisee, Team Kasa, LLC, along with its three owners, filed suit in the Eastern District of New York (Case No. 2:17-cv-01074) against former CEO Brian Pappas, and Franventures. The same Plaintiffs also initiated arbitration on the same issues (American Arbitration Association, Case No. 01-17-0001-1968), alleging the Company is jointly and severally liable for damages resulting from the allegations against Mr. Pappas and Franventures. The Company is contesting the allegations and its liability for any damages.

On November 8, 2017, franchisee, Indy Bricks, LLC, along with its two owners, Ben and Kate Schreiber initiated arbitration against the Company. (American Arbitration Association, Case No. 01-17-0006-8120). Plaintiffs allege breach of contract, fraud, material misrepresentations and omissions, violations of the Indiana Franchise Act, and violations of the Indiana Deceptive Franchise Practices Act. The Company is vigorously contesting the allegations and its liability for any damages.

Management of the Company believes no other such litigation matters involving a reasonably possible chance of loss will, individually or in the aggregate, result in a material adverse effect on the Company's financial condition, results of operations and cash flows.

(7) Revenue Recognition

The Company adopted the new revenue standard (Topic 606) on October 1, 2018. The Company applied the new revenue standard using the modified retrospective transition method. The adoption of the new guidance changed the timing of recognition of franchise sales and franchise renewal revenue and related commissions paid on franchise sales, as discussed below.

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Franchise sales is comprised of revenue from the sale or renewal of franchises. The Company previously recognized revenue at the time of sale. Under the new revenue standard, the franchise sale initial fees are considered to be a part of the license of symbolic intellectual property, which is now recognized over the contractual term of the franchise agreement, which is typically 10 years. Correspondingly, the commissions related to franchise sales are recorded as an asset (the current portion in “Commission expense” on the balance sheet, and long- term portion in “Commission expense - net of current portion”) on the balance sheet, and are recognized over the contractual term of the franchise agreement in “Commission Expense” on the statement of operations. Previously, such commissions were expensed as incurred.

The following tables summarize the impacts of the new revenue standard adoption on the Company’s Form 10-Qfinancial statements:

Consolidated Balance Sheet

Impact of Changes in Accounting Policies
As of March 31, 2019
  As previously       
  reported  Adjustments  As Adjusted 
Prepaid Commission Expense  -   291,748   291,748 
Prepaid Commission Expense - net of current portion  -   1,354,285   1,354,285 
Deferred Revenue  -   1,096,450   1,096,450 
Deferred Revenue - net of current portion  -   4,315,442   4,315,442 
Accrued Marketing Fund  97,334   (62,578)  34,756 
Accumulated Deficit  (2,391,525)  (4,433,675)  (6,825,200)

Consolidated Statement of Income

Impact of Changes in Accounting Policies
As of March 31, 2019
  As previously       
  reported  Adjustments  As Adjusted 
Franchise Fees  -   1,229,697   1,229,697 
Advertising Fund Revenue  -   582,038   582,038 
Commission Expense  -   441,773   441,773 
Advertising Expense  -   582,038   582,038 
Income before income taxes  -   787,924   787,924 
Net Income  -   787,924   787,924 

Consolidated Statement of Cash Flows

Impact of Changes in Accounting Policies
As of March 31, 2019
  As previously       
  reported  Adjustments  As Adjusted 
Net Income  -   787,924   787,924 
Prepaid Commission expense  -   (1,646,033)  (1,646,033)
Deferred revenue  -   5,411,892   5,411,892 

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Advertising Fund Revenue - 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 towards national branding of the Company’s concepts to benefit the franchisees. Upon adoption of FASB 606 on October 1, 2018, the Company began presenting these expended revenues on a gross revenue basis on its statement of operations as per FASB ASC 606-10-55-39.

Royalties - Royalties are calculated per franchise and are recognized on a flat fee schedule as per the Franchise Agreements. These fees are recognized as earned on a monthly basis as per FASB ASC 606-10-55-65.

Transaction Price Allocated to the Remaining Performance Obligations

The following table includes estimated revenue by year, excluding certain other immaterial items, expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:

  March 31, 2020  March 31, 2021  March 31, 2022  March 31, 2023  March 31, 2024 and
thereafter		 
Initial Franchise Fees $1,096,450  $1,076,972  $1,022,746  $911,137  $1,304,588 

(8) Sale of Condominium

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

(9) Subsequent Events

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

On July 9, 2019 the Company completed the sale of a condominium conference space listed for sale for proceeds of $60,000 and recorded a gain of approximately $22,000 which represented the excess of the proceeds over the carrying value on that date.

Effective, September 30, 2019, Blake Furlow resigned as Chief Executive Officer of the Company. Mr. Furlow will remain a Director of the Company. Mr. Furlow will receive severance of $30,000 pursuant to the terms of a Severance.In connection with the obligations of his former employment agreement, the Company issued an aggregate of 573,176 shares of Common Stock to Mr. Furlow.

 Effective September 30, 2019, Bart Mitchell, the Company’s Chief Financial Officer, was appointed Chief Executive Officer of the Company. In connection with this appointment, Mr. Mitchell entered into an Employment Agreement with the Company as of October 1, 2019 for the quarter ended March 31,term of one year. In addition to cash compensation, he will receive stock grants valued at lesser of $15,000 or 200,000 Shares of Common Stock on the last day of the completed year of employment. Mr. Mitchell will continue to serve as a member of the Board of Directors of the Company, but will no longer serve as the Company’s Chief Financial Officer.

On November 14, 2019, in connection with their service on the Board of Directors for fiscal years 2017, 2018 under Note 7 in Notesand 2019, the Company issued (i) 99,362, (ii) 272,472,(iii) 112,739 and (iv) 272,472 shares of Common Stock to Financial Statements,Blake Furlow, Gary Herman, Bart Mitchell and Part II, ItemJoyAnn Kenny-Charlton, respectively as well as a total of $85,041 for directors fees.

Effective October 1, there have been no significant developments in2019, Robert Boyd was appointed Chief Accounting Officer of the pending legal proceedingsCompany. Mr. Boyd and the Company entered into a one-year employment agreement.

On October 30, 2019 the Company completed the sale of a condominium conference space listed for sale for proceeds of approximately $99,000.

On December 6, 2019, the Company initiated arbitration against two franchise owners, Christopher Rego and John Simento. (American Arbitration Association, International Centre for Dispute Resolution, Case No. 01-19-0004-4019) The Company is seeking actual, statutory and punitive damages, as previously reported in Note 10, Commitmentswell as injunctive relief, violation of the two owners’ franchise agreement, failure to pay royalties, unauthorized use of trademarks and Contingencies,operation of our Consolidated Financial Statements in our Annual Report on Form 10-K, forcompeting business. This case is being actively litigated by the year ended September 30, 2017.Company.


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Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and ResultsPlan of OperationsOperation

 

Overview

 

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 and subsequent 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 June 30, 2018,At March 31, 2019, the Company had 497391 Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 3128 Bricks 4 KidzKidz® master franchises, and 119159  Bricks 4 KidzKidz® sub-franchises operating in 4638 countries.

 

Three Months Ending June 30, 2018March 31, 2019 Highlights

 

The Company experienced an increase in new franchise sales of approximately $60,000revenue due primarily to the Company recognizing revenue on prior year initial franchise fees during the quarter as a result of adopting FASB ASC 606 in the prior quarter.

Royalty fees revenue decreased approximately $80,000 during the three months ended June 30, 2018,March 31, 2019 as compared to the quarterthree months ended June 30, 2017. Accordingly, revenues were $618,047 forMarch 31, 2018 due to off-boarding several inactive franchisees during the three months ended June 30,March 31, 2018 which lead to fewer franchisees at March 31, 2019 as compared with $551,657 into March 31, 2018.

In addition, advertising fund revenue increased approximately $37,000 during the three months ended JuneMarch 31, 2019 as compared to the three months ended March 31, 2018 due to the application of FASB ASC 606 during the three months ended December 30, 2017. The Company sold a new domestic franchise, a new international master franchise,2018 which requires advertising fund revenues and expenses to be recorded on the gross method basis on the statement of operations. Prior to FASB ASC 606, these revenues and expenses were recorded as well as a new international sub-franchise inpart of the current quarter. Inmarketing liability account on the quarter ended June 30, 2017, the Company only added one international sub-franchise.balance sheet.

 

Operating expenses decreasedExpenses increased to approximately $483,000$705,000 in the quarter ended June 30, 2018March 31, 2019 from approximately $953,000$569,000 in the quarter ended June 30, 2017,March 31 2018, or $470,000,$136,000, primarily due mostly to the increase in franchise commissions as a result of applying the modified retrospective approach of adopting FASB ASC 606 during the previous quarter in 2019 for the amortization of previously expensed commissions related to franchise sales. This increase was partially offset by a decrease in stock-based compensation of approximately $312,000 and significant decreases in professional fees of apporoximately $122,000. The decrease in stock-based compensation wasbad debt expense due to stock grants and stock option grants madea large amount of off-boarding that occurred in Q2 2018 which created an increase in the bad debt for uncollected royalty fees.

The Company’s net income for the quarter ended March 31, 2019 was $310,145 as compared to board members and officersnet income of the Company$38,736 in the quarter ended June 30, 2017, while noneMarch 31, 2018.

Six Months Ending March 31, 2019 Highlights

The Company experienced an increase in new franchise sales revenue due primarily to the Company recognizing revenue on prior year initial franchise fees during the six months ended March 31, 2019 as a result of adopting FASB ASC 606 during the first quarter.

Royalty fees revenue decreased approximately $71,000 during the six months ended March 31, 2019 as compared to the six months ended March 31, 2018 due to off-boarding several inactive franchisees during the six months ended March 31, 2018 which lead to fewer franchisees at March 31, 2019 as compared to March 31, 2018.

In addition, advertising fund revenue increased approximately $582,000 and advertising fund expense increased approximately $585,000 during the six months ended March 31, 2019 as compared to the six months ended March 31, 2018 due to the application of FASB ASC 606 as of October 1, 2018 which requires advertising fund revenues and expenses to be recorded on a gross method basis on the statement of operations. Prior to FASB ASC 606, these revenues and expenses were maderecorded as part of the marketing liability account on the balance sheet.

Operating Expenses increased to approximately $1,900,000 in the current quarter.six months ended March 31, 2019 from approximately $1,300,000 in the six months ended March 31, 2018, or $600,000, primarily due to the increase in franchise commissions and advertising expense as a result of applying the modified retrospective approach of adopting FASB ASC 606 effective October 1, 2018 for the amortization of previously expensed commissions related to franchise sales and advertising for franchises. This increase was partially offset by a decrease in bad debt expense due to a large amount of off-boarding occurring in Q2 2018 which created an increase in the bad debt for uncollected royalty fees. The increase was also offset by a decrease in professional fees wasand legal settlements due to less legal activity and a more streamlined approach to handling legal issues in the current quarter.

The provision for income taxes decreased to approximately $19,000 in the quarter ended June 30, 2018 from approximately $433,000 in the quarter ended June 30, 2017, or $414,000, due to a 100% valuation allowance on the deferred tax asset that was created in the previous year.

 

The Company hadCompany’s net income for the quartersix months ended June 30, 2018 of $114,172March 31, 2019 was $1,008,685 as compared to a net loss of $831,524 in$66,918 for the quartersix months ended June 30, 2017.March 31, 2018.

 

Nine Months Ending June 30, 2018 Highlights

The Company experienced a decrease in royalty fees of approximately $72,000 in the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017 primarily due to less contract settlement fees. During the nine months ended June 30, 2018, there were approximately $15,000 in contract settlement fees as compared to $75,000 during the nine months ended June 30, 2017. Therefore, revenues were $1,822,854 for the nine months ended June 30, 2018 compared with $1,872,328 for the nine months ended June 30, 2017.

Operating expenses decreased to approximately $1,755,000 in the nine months ended June 30, 2018 from approximately $2,546,000 in the nine months ended June 30, 2017, or $791,000, due to significant decreases in professional fees of $574,000 as well as a decrease in stock-based compensation of $310,000. The decrease in professional fees was due to a more streamlined approach to handling legal issues in the current year, and the decrease in stock-based compensation was due to stock grants and stock option gratns made to board members and officers of the Company in the previous year. Partially offsetting these decreases, bad debt expense increased approximately $137,000 due to the write-off of several inactive franchisees as well as the continuing review of receivables for collectability.

The provision for income taxes decreased to approximately $19,000 in the nine months ended June 30, 2018 from approximately $356,000 in the nine months ended June 30, 2017, or $337,000, due to a 100% valuation allowance on the deferred tax asset that was created in the previous year.

The Company had net income for the nine months ended June 30, 2018 of $47,254, compared to a net loss of $1,010,858 for the nine months ended June 30, 2017.


Liquidity and Capital Resources

 

The Company’s primary source of liquidity is from cash generated through operations. From January of 2016 through August 2016,For the reporting period, the Company was not able to selltemporarily suspended domestic franchise offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in the United States, and at the same time the Company had significant professional fees and regulatory cash outlays which put adverse pressure oncompliance with FTC Franchise Rule, Section 436.7(a) due to delay in completion of the Company’s liquidity. The Company believes its cash outlays related to professional feesfiscal year 2018 consolidated audited financial statements. In turn, this delayed completion of the Company’s 2018 and regulatory functions have been returning to traditional levels2019 FDDs for a similar business. The Company will explore all options to improve liquidity.the Bricks 4 Kidz® and Sew Fun Studios® franchise offerings

 

The Company continually evaluates the needis dependent upon both franchise sales and availability of long-term capital in orderroyalty fees to meet its cash requirementscontinue current business operations and fund potential new opportunities. The Company cannot predict whether future financing, if any, will be in the form of equity, debt, or a combination of both. Any equity financing could be dilutive to stockholders. The Company may not be able to obtain additional funds on a timely basis, on acceptable terms, or at all, and other than a line of credit with two Directors, the Company has no commitments, agreements or understandings with respect to any equity or debt financing.liquidity.

 

The Company’s cash, cash equivalents and restricted cash balance at March 31, 2019 was $136,328 as compared to a balance of $103,198 at September 30, 2018. The Company has entered into Lettershad a working capital deficit of Credit agreements with two Directors for$418,416 at March 31, 2019 as compared to working capital of $110,041 at September 30, 2018. The decrease in working capital during the benefitperiod is primarily due to the application of FASB ASC 606 at October 1, 2018 which significantly increased the Company. The aggregate value of the Letters of Credit is $100,000 and is subject to market rates and terms. As of June 30, 2018, no amounts were outstanding on these letters of credit.Company’s short term deferred revenue.

 

Cash funds are used for ongoing operating expenses, the purchase of equipment, property improvement, and software development. During the ninesix months ended June 30,March 31, 2019 and 2018, the Company purchased property and equipment totaling approximately $117,000. The majority$123,000 and $73,000.

On November 14, 2018, the Company completed the sale of its condominium held for sale for proceeds of approximately $86,000 and recorded a gain of approximately $43,000, which represented the excess of the funds, approximately $92,000, were spentproceeds over the carrying value on creating a franchise management software tool. The Company also paid down accrued liabilities, related to legacy legal costs and settlements, of approximately $116,000 during the nine months ending June 30, 2018. These are not recurring costs, and the Company believes that going forward the cash will be sufficient for its operational needs.date.

17

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable to us as a smaller reporting company.

 

Item 4. Controls and Procedures

 

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation regarding the three months ended June 30, 2018,March 31, 2019, under the supervision and with the participation of our management, including our Chief Operating Officer/Chief Financial Officer who serves as our Principaland Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our management concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

 


The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

In our 2017 Annual Report on Form 10-K, the Company concluded internal controls over financial reporting were effective on September 30, 2017.

18

 


PART II

 

Item 1. Legal Proceedings

 

ExceptThere is no new litigation or changes to matters currently outstanding as disclosed inof the Company’s Form 10-Q for10-K filed with the quarter ended March 31, 2018, under Note 7 in Notes to Financial Statements, and Part II, Item 1, there have been no significant developments in the pending legal proceedings as previously reported in Note 10, Commitments and Contingencies, of our Consolidated Financial Statements in our Annual Report on Form 10-K,SEC for the year ended September 30, 2017.2018.

 

Item 1A. Risk Factors

Not applicable.

 

For information regarding factors that could affect the Company’sCompany's results of operations, financial condition and liquidity, see the risk factors discussed under Part II, Item 1A of CLC’sCLC's most recent annual report on Form 10-K for the fiscal year ended September 30, 2017.10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.None

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.None

 


19

 

Item 6. Exhibits

31.1Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2Certification of Principal Accounting Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document  


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

CREATIVE LEARNING CORPORATION
Dated: August 13, 2018By: /s/ Christian Miller
Christian Miller,
Chief Operating Officer and Chief Financial Officer 
(Principal Executive Officer and Financial Officer)
CREATIVE LEARNING CORPORATION
Dated: August 13, 2018By: /s/ Dawn Davis
Dawn Davis, Controller
(Principal Accounting Officer)


EXHIBIT INDEXExhibits

 

Exhibit No. Exhibit
   
10.1Form of Confirmation Letter from certain Directors and Officers (Incorporated by reference to Exhibits of the Company’s Form 10-K for the year ended September 30, 2018).
31.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
31.2 Certification of Principal Accounting Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
   
32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

20

18

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CREATIVE LEARNING CORPORATION
Dated: December 6, 2019By:/s/ Robert Boyd 
Robert Boyd  
Chief Accounting Officer
(Principal Financial Officer)  

CREATIVE LEARNING CORPORATION
Dated: December 6, 2019By:/s/ Bart J. Mitchell 
Bart J. Mitchell,

Chief Executive Officer, Board Member

(Principal Executive Officer)

21

EXHIBIT INDEX

Exhibit No.Exhibit
10.1Form of Confirmation Letter from certain Directors and Officers (Incorporated by reference to Exhibits of the Company’s Form 10-K for the year ended September 30, 2018).
31.1Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2Certification of Principal Accounting Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

22