UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period endedJune 30,December 31, 2019

o☐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

(Exact name of registrant as specified in its charter)

P.O. Box 4502

Boise, ID 83711

 (Address of principal executive offices, including Zip Code)

(904) 824-3133

 (Issuer’s telephone number, including area code)

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

Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act 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☒No ☐

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNoo☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small 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.

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 o☐ No x☒

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 13,354,26113,577,716 shares of common stock as of December 5, 2019.April 23, 2020.

CREATIVE LEARNING CORPORATION

FORM 10Q10-Q

PeriodQuarter Ended June 30,December 31, 2019

TABLE OF CONTENTS

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:

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, 20182019 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-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.

PART I

Item 1. Financial Statements

CREATIVE LEARNING CORPORATION

Condensed Consolidated Balance SheetsThe accompanying notes are an integral part of the condensed consolidated unaudited financial statements.

CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Operations (Unaudited)

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

CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Operations (Unaudited) 

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

CREATIVE LEARNING CORPORATIONCreative Learning Corporation

Condensed Consolidated StatementsStatement of Cash FlowsChanges in Stockholders' Equity (Deficit) (Unaudited)

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

CREATIVE LEARNING CORPORATION

Condensed Consolidated StatementStatements of Changes in Stockholders' Equity (Deficit)

Cash Flows (Unaudited)

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

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's enrichment and education franchises. As of June 30,December 31, 2019, BFK franchisees operated in 374501 territories in 3836 states and 40 countries.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s results for the interim periods that have been included. The results for the three and six months ended June 30,December 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, 2018.2019.

Related Parties

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

Use of Estimates

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

Reclassification

Certain account balances from prior periods have been reclassified in these consolidated financial statements to conform to current period classifications. 

Cash, Restricted Cash and Cash Equivalents

The Company had restricted cash of approximately $24,000$35,000 and $23,000$18,000 at June 30,December 31, 2019 and September 30, 2018,2019, respectively, associated with marketing funds collected from the franchisees. Per the franchise agreements a marketing fund of 2% of franchisees gross cash receipts is collected and held to be spent on the promotion of the brand. Any cash collected by the Company for marketing funds is held in a separate bank account and any balance at period end is presented as “restricted cash” and “accrued marketing fund” on the balance sheet. See Note 4 for additional information.

Accounts and Note Receivables

The Company reviews accounts and notes receivable periodically for collectability, establishes an allowance for doubtful accounts, and records bad debt expense when deemed necessary. The Company records an allowance for doubtful accounts and notes that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Receivables and notes are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts at June 30,December 31, 2019 and September 30, 20182019 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.

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:

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 when a company satisfies a performance obligation by transferring a promised good or service to a customer. 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 yearyears 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 advertisingmarketing 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 additional ten-year term forUpon entering into a fee. The following is a description of principal activities from whichfranchise agreement, the Company generates its revenue.

Initial Franchise Fee - Sincecharges 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. The franchise fees are fully collectible and nonrefundable as of the date of the signing of the franchise agreement. 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:

Commissions paid on initial franchise sales are recognized as an asset and amortized over the contract life of the franchise agreement. The activity in the Company’s capitalized contract costs for commissions consist of the following:

Advertising Fund Revenue - Per the terms of the franchise agreements, the Company collectscharges 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, each month, due on the third day of the following month, for a marketing fund,which is managed by the Company, to allocate towards national branding of the Company’s concepts to benefit the franchisees. ThisLastly, the Company charges for technology fees on a monthly basis, generally at a fixed amount, for the use of the company Franchise Management tool as well as company emails, etc.

Effective October 1, 2018 the Company began recognizing revenue under ASC 606. The Company considers initial franchise fees to be a part of the license of symbolic intellectual property (“IP”), therefore the performance obligation related to these fees is satisfied over time as the Company fulfills its promise to grant the customer rights to use, and benefit from, the Company’s IP, as well as support and maintain the IP. The initial franchise fee, then, is recorded as deferred revenue at inception and recognized on a monthly basis.straight-line basis over the contract term.

In accordance with ASC 606-10-55-65, the Company has determined that the royalty fees, marketing fees, and technology fees are subject to a sales and usage-based royalties’ constraint on licenses of IP. Accordingly, these fees are recognized as revenue at the later of when the sales or usage occurs or the related performance obligation is satisfied. Technology fees are recorded net of processing fees. Marketing fees are limited to the lesser of marketing amounts earned or expensed; therefore, the Company will recognize amounts received in excess of amounts spent on the balance sheet in the accrued marketing fund liability and will recognize amounts spent in excess of amounts received on the balance sheet in the marketing fund receivable.

The Company collects transfer fees when contracts are transferred between parties and accounts for the transfer as a contract modification under ASC 606. Because the transfer does not increase the scope of the contract or promise any additional goods or services and there are no new distinct services that will be provided after the transfer the Company considers the transfer fee part of the existing contract. Transfer fees, then, are recorded as deferred revenue at inception and recognized on a straight-line basis over the remaining contract term.

When contracts are terminated due to default, or in conjunction with an early termination agreement, the Company accounts for the early termination as a contract modification under ASC 606. Because the termination eliminates any future performance obligations of the Company any deferred revenue associated with the terminated contract is recognized into revenue at the time of termination, along with any early termination fees, in the initial franchise fee line on the Company’s Statement of Operations.

The Company generates revenue from sales of merchandise where the performance obligation is met, and therefore revenue recognized, upon the delivery of merchandise to the customer.

Contract Liability – Deferred Revenue

In conjunction with the adoption of ASC 606, effective October 1, 2018 the Company recorded deferred revenue as a contract liability for its initial franchise fees collected and related to contracts with remaining performance obligations. During the three months ended December 31, 2019 the activity in the deferred revenue account was as follows:

Amounts expected to be recognized into revenue related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2019 were as follows:

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 began presentingpresents these marketing fund revenues and expenses on a gross revenue basis on its statement of operationsoperations. Any unused funds at the end of the period are recorded as per FASB ASC 606-10-55-39.

accrued marketing fees or any funds used in excess of funds collected are recorded as a marketing fund receivable. During the three months ended December 31, 2019, the Company recorded franchisee marketing fund expenses in advance of billings in the amount of $74,418. The Company expects to collect this advance in future periods from the 2% fees collected on future franchisee gross revenues. The activity in the Company’s accrued marketing fund for advertising fund revenue accounts consistsliability account was as follows:

Contract Asset – Prepaid Commission Expense

In accordance with ASC 606 the costs related to obtaining a contract are to be capitalized as long as the costs are recoverable and incremental. Effective October 1, 2018, the date the Company adopted ASC 606, they capitalized the value of sales commissions as a contract asset and is amortizing those costs straight-line over the contract life of the following:franchise agreement to which they relate. During the three months ended December 31, 2019 the activity in the contract asset account was as follows:

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.General Advertising Costs

Advertising Costs

AdvertisingGeneral advertising costs for the operating company are expensed as incurred. The Company incurred general advertising costs for the three and nine months ended June 30,December 31, 2019 and 2018 of approximately $2,000 and $11,000, respectively, and for the three and nine months ended June 30, 2018 of approximately $16,000 and $22,000,$7,000, respectively.  Advertising costs of approximately $620,000 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 ninethree months ended June 30,December 31, 2019.

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,December 31, 2019 and September 30, 2018,2019, respectively, and has not recognized interest and/or penalties during the ninethree months ended June 30,December 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 20142015 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 June 30, 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.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”) and has since issued various amendments which provide additional clarification and implementation guidance on Topic 606. This guidance establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for 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 to those contracts which were not completed as of October 1, 2018.

The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit at the beginning of fiscal 2018. In performing its analysis, the Company reflected 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 those periods under “Revenue Recognition” (“Topic 605”). Refer to Note 7 for further disclosure of the impact of the new guidance.

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

In November 2016, the FASBAll other newly issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that entities show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on October 1, 2018, and such adoption didaccounting pronouncements, but not yet effective, have a material impact on our financial statements.been deemed either immaterial or not applicable.

On December 29^th and 31^st, 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, 2019, no amounts were outstanding on these lines of credit.

(3)(2) Notes and Other Receivables

At June 30,December 31, 2019 and September 30, 2018,2019, respectively, the Company held certain notes receivable totaling approximately $6,000$0 and $15,000$3,000 respectively, net of allowances, for extended payment terms of franchise fees. The notes receivable bear interest at 3% per yearare non-interest bearing with monthly payments, payable within one year. The Company analyzes the collectability of all receivables and reserves accordingly.

(4) Accrued Marketing Fund(3) Commitments and Contingencies

Per the termsEmployment Agreements

The Company entered into an Employment Agreement with Mr. Mitchell as 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.

All marketing fund fees net of expenses were accounted for as a liability on the balance sheet prior to adoption of FASB ASC 606 on October 1, 2018. Upon adoption of FASB 606 on October 1, 2018, the Company presents these revenues on a gross revenue basis on its statement of operations. Any unused funds at the end of the period are recorded as accrued marketing fees (see Note 7).

(5) Stock-Based Compensation

On December 29^th and 31^st, 2017, the Company granted 14,286 shares to Directors and Officers2019 appointing him Chief Executive Officer of the Company. These shares were issued in conjunction withThe employment agreement provides for a one year term. Mr. Mitchell’s annual cash compensation increased to $150,000 and he is entitled to receive stock grants valued at the issuancelesser of lines$15,000 or 200,000 Shares of credit from the two directors. The fair valueCommon Stock.

Effective October 1, 2019, Robert Boyd was appointed Chief Accounting Officer of the shares on the date of grant were $2,000Company. Mr. Boyd and the shares vested immediately. The Company expensed $2,000 in connection with the grant during the quarter ended December 31, 2017. No stock-basedentered into a one year employment agreement which provides that Mr. Boyd’s compensation was granted during the nine months ended June 30, 2019.will be $40,000 per annum.

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.

(6) Commitments and Contingencies

Lease Commitments

Rent expense was approximately $10,000 and $30,000, for the three and nine months ended June 30, 2019, respectively, and approximately $5,000 and $14,000 for the three and nine months ended June 30, 2018, respectively. There are no lease commitments with terms greater than one year.

Litigation

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

On October 2, 2015, the Company filed suit in the state court in St. John’s County, Florida, Case No. CA 15-1076, against its former Chief Executive Officer Brian Pappas, Christine Pappas, its former Human Resources officer, and an independent company controlled by Mr. Pappas named Franventures, LLC (“Franventures”). The lawsuit seeks return of company emails and other electronic materials in the possession of the defendants, company control over the process by which the company’s documents are identified, and a court judgment that the property is the Company’s. Mr. and Mrs. Pappas have returned certain company documents that they have identified, but other issues remain. On December 11, 2017, Brian Pappas filed a counterclaim alleging the Company is required to indemnify him for a multitude of matters. The Company denies the allegation and is actively litigating this matter. On January 29, 2020, the court entered an order denying Mr. Pappas’ motion for summary judgment on his indemnification claim.

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 caseThe Company is being actively litigated by the Company.litigating this matter.

On October 27, 2016, Brian Pappas filed a motion to amend the complaint in CA 15-1076 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. This case has 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). 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.This arbitration was settled on April 23, 2020 (see Note 7).

Management ofOn December 6, 2019, 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 effectinitiated arbitration against two franchise owners. This case was settled on the Company's financial condition, results of operations and cash flows.February 5, 2020.

(7) Revenue Recognition(4) Directors Compensation

TheDuring the three months ended December 31, 2019, the Company adoptedaccrued for a total of $5,000 for cash compensation owed to two directors for their services provided during the new revenue standard (Topic 606) on October 1, 2018. Thefirst quarter 2020. During the three months ended December 31, 2019, the Company appliedalso accrued for a total of $5,000 for stock-based compensation owed to the new revenue standard usingtwo directors for their services provided during 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.

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 arefirst quarter 2020. This accrual was 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 financial statements:

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 operationsliability as per FASB ASC 606-10-55-39.480-10-55-2 and will be recorded as equity upon issuance of shares.

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:

(8)(5) 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 July 9,October 30, 2019 the Company completed the sale of a condominium conference space listed for sale for proceeds of $60,000approximately $100,000 and recorded a gain of approximately $22,000$21,000, 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 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 and 2019, the Company issued (i) 99,362, (ii) 272,472,(iii) 112,739 and (iv) 272,472 shares of Common Stock to Blake Furlow, Gary Herman, Bart Mitchell and JoyAnn Kenny-Charlton, respectively as well as a total of $85,041.

Effective October 1, 2019, Robert Boyd was appointed Chief Accounting Officer of the Company. 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 well as injunctive relief, violation of the two owners’ franchise agreement, failure to pay royalties, unauthorized use of trademarks and operation of competing business. This case is being actively litigated by the Company.

On December 12, 2019 Blake Furlow resigned as a member of the Board of Directors of Creative Learning Corporation and from his position as Chairman of the Board of Directors.

(6) Restatement of Prior Period Financial Statements

The Company has restated its previously reported consolidated statement of operations and statement of cash flows to correct certain revenues and expenses and to properly reflect the effect of FASB ASC 606 upon its adoption. The tables below illustrate these restatements:

Statement of operations for the three months ended December 31, 2018:

Statement of cash flows for the three months ended December 31, 2018:

Statement of stockholders’ equity (deficit) for the three months ended December 31, 2018:

These restatements had no effect on net income for the three months ended December 31, 2018.

(7) Subsequent Events

On January 13, 2020, 35,714 shares of common stock were approved to be issued to Gary Herman for his first quarter 2020 board compensation.

On January 30, 2020, the World Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern" and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the company, to date, the Company is experiencing declining royalty fee revenue from some of its franchisees whose revenues have been decreasing due to school closures and rules about social distancing. Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including expected collections on receivables.

On February 5, 2020, the Company entered into an agreement with Christopher Rego and Rod Whiton, pursuant to which Bart Mitchell resigned from the Company’s board of directors, and Christopher Rego and Rod Whiton were appointed to the Company’s board of directors. In connection with Mr. Rego’s appointment, he was also named chief executive officer of BFK Franchise Company, LLC (“BFK”), a subsidiary of the Company, and will become chief executive officer of the Company at the earlier of March 31, 2020 or when the Company files its Form 10-K for the year ended September 30, 2019 and its Form 10-Q for the period ended December 31, 2019.By mutual agreement between the Company and Mr. Rego on April 1, 2020, Mr. Rego has agreed that he will not become the chief executive officer of CLC until the earlier to occur May 1, 2020 or when the Company files its Form 10-K for the year ended September 30, 2019 and its Form 10-Q for the period ended December 31, 2019. Mr. Rego will continue to serve as chief executive officer of BFK Franchise Company, LLC. Upon Mr. Rego’s appointment as chief executive officer of CLC, Mr. Mitchell will become the president of the Company. Mr. Rego’s compensation has not yet been determined for serving as an officer of BFK Franchise Company, LLC or the Company.

On April 23, 2020, a settlement agreement was entered into between Indy Bricks, LLC, along with its two owners, Ben and Kate Schreiber and the Company whereas the arbitration was dismissed. As per the settlement agreement, Indy Bricks, LLC will pay the Company an agreed amount of past due franchise fees, monthly marketing and royalty fees, and monthly fees to utilize the Company’s FMS.

Item 2. Management's Discussion and Analysis of Financial Condition and Plan of Operation

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. At June 30,As of December 31, 2019, the Company had 374501 Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 28 Bricks 4 Kidz® master franchises, and 159138 Bricks 4 Kidz® sub-franchises operating in 3840 countries.

Three Months Ending June 30, 20191^stQuarter FY 2020 Highlights

The Company experienced an increasedecrease in new franchise sales revenue due primarily to the Company recognizing revenue on prior year initial franchise fees during the quarter ending December 31, 2019 was primarily due to more offboards in the comparative period in which the deferred revenue on the terminated contract was recognized immediately as per FASB ASC 606.

Royalties fees revenue decreased by approximately $117,000 due to the offboarding of several franchisees during the year ended September 30, 2019, thus fewer franchisees were paying royalties in the current period versus the same period of the prior year.

Marketing fund revenue increased approximately $25,000 due to an increase in marketing fund expenses in the current period. Because marketing fund revenues and expenses are limited to the lesser of amounts spent by the Company or amounts billed to customers, the increase in spend over the prior year resulted in an increase in revenue from the prior year.

Operating Expenses decreased to approximately $509,000 in the quarter ended December 31, 2019 from approximately $680,000 in the quarter ended December 31, 2018, or $171,000, primarily due to the increase in franchise commissions expense as a result of adoptingmore offboards in the comparative period in which the deferred expense on the terminated contract was recognized immediately as per FASB ASC 606 on October 1, 2018.

Royalty fees revenue decreased approximately $85,000 during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 due to off-boarding several inactive franchisees during the three months ended June 30, 2018 which lead to fewer franchisees at June 30, 2019 as compared to June 30, 2018.

In addition, advertising fund revenue increased approximately $38,000 during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 due to the application of FASB ASC 606 on October 1, 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 part of the marketing liability account on the balance sheet.606.

The net income for the quarter ended June 30,December 31, 2019 was $635,333$299,148 as compared to net income of $114,172$698,540 in the quarter ended June 30,December 31, 2018.

Nine Months Ending June 30, 2019 Highlights

The Company experienced an increase in new franchise sales revenue duedecrease was primarily to the Company recognizing revenue on prior year initial franchise fees during the nine months ended June 30, 2019 as a result of adopting FASB ASC 606 on October 1, 2018.

Royalty fees revenue decreased approximately $156,000 duringmore offboards in the nine months ended June 30, 2019 as compared tocomparative period in which the nine months ended June 30, 2018 due to off-boarding several inactive franchisees during the nine months ended June 30, 2018 which lead to fewer franchisees at June 30, 2019 as compared to June 30, 2018.

In addition, advertising fund revenue increased approximately $620,000 and advertising fund expense increased approximately $609,000 during the nine months ended June 30, 2019 as compared to the nine months ended June 30, 2018 due primarily to the application of FASB ASC 606 as of October 1, 2018 which requires advertising funddeferred revenues and expenses to be recorded on a gross method basis on the statement of operations. Prior toterminated contracts were recognized immediately as per FASB ASC 606, these revenues and expenses were recorded as part of the marketing liability account on the balance sheet.606.

Operating Expenses increased to approximately $2,400,000 in the nine months ended June 30, 2019 from approximately $1,800,000 in the nine months ended June 30, 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 the nine months ended June 30, 2018 which created an increase in the bad debt for uncollected royalty fees. The increase was also offset by a decrease in professional fees and legal settlements due to less legal activity and a more streamlined approach to handling legal issues in the current year.

The net income for the nine months ended June 30, 2019 was $1,644,018 as compared to a net income of $47,254 for the nine months ended June 30, 2018.

Liquidity and Capital Resources

The Company’s primary source of liquidity is cash generated through operations. For the reporting period, theThe Company has currently temporarily suspended domestic franchise offers and sales of Bricks 4 Kidz® and Sew Fun Studios® franchises in compliance with FTC Franchise Rule, Section 436.7(a) due to delay in completion of the Company’s fiscal year 2018 and 2019 consolidated audited financial statements as well as the Company’s December 31, 2019 consolidated financial statements. In turn, this delayed completion of the Company’s 2018 and 2019 FDDs for the Bricks 4 Kidz® and Sew Fun Studios® franchise offerings

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

The recent Coronavirus 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 Coronavirus (“COVID-19”) continues to grow both in the United States and globally, and related government and private sector responsive actions have and will continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.

The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, including warning against congregating in heavily populated areas, such as malls and shopping centers. Among the precautions has been the closure of a substantial portion of the schools in the United States, which will adversely impact our royalty revenue from franchisees. There is significant uncertainty around the breadth and duration of these school closures and other business disruptions related to COVID-19, as well as its impact on the U.S. and global economy. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. We have asked our corporate employees whose jobs allow them to work remotely to do so for the foreseeable future. Such precautionary measures could create operational challenges as we adjust to a remote workforce, which could adversely impact our business.

Cash funds are used for ongoing operating expenses, the purchase of equipment, property improvement, and software development. During the nine monthsquarters ended June 30,December 31, 2019 and 2018, the Company purchased property and equipment totaling approximately $123,000$0 and $117,000.$123,000.

On November 14, 2018,October 30, 2019 the Company completed the sale of itsa condominium held for saleconference space for proceeds of approximately $86,000$100,000 and recorded a gain of approximately $43,000,$21,000, which represented the excess of the proceeds over the carrying value on that date.

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,December 31, 2019, under the supervision and with the participation of our management including our Chief Operating Officer and 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 2019 Annual Report on Form 10-K, the Company concluded internal controls over financial reporting were not effective as of September 30, 2019.

PART II

Item 1. Legal Proceedings

There is no new litigation or changes to matters currently outstanding as of the 10-K filed with the SEC for the year ended September 30, 2018.2019.

Item 1A. Risk Factors

For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors discussed under Part II, Item 1A of CLC's most recent annual report on Form 10-K.

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

None

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information 

None

Item 6. Exhibits

Exhibits 

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.

EXHIBIT INDEX

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.