UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

☐     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)

 

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

(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)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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  ☒   No  ☐

 

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  ☒   No  ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No  ☒

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12,090,161 shares of common stock as of July 30, 2018. 

 

 

CREATIVE LEARNING CORPORATION

FORM 10Q

Quarter Ended June 30, 2018

 

TABLE OF CONTENTS

			Page No.
	PART I
Item 1.	Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		13
Item 4.	Controls and Procedures		13
	PART II
Item 1.	Legal Proceedings		15
Item 1A.	Risk Factors		15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		15
Item 3.	Defaults Upon Senior Securities		15
Item 4.	Mine Safety Disclosures		15
Item 5.	Other Information		15
Item 6.	Exhibits		16

 

 

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”) 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 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.

 

 

PART I

 

Item 1. Financial Statements

CREATIVE LEARNING CORPORATION
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

 

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

 

 

CREATIVE LEARNING CORPORATION
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

 

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

 

 

CREATIVE LEARNING CORPORATION
Consolidated Statements of Cash Flows (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

 

The accompanying notes are an integral part of the consolidated 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, 2018, BFK franchisees operated in 643 territories in 40 states and 46 countries, and SF franchisees operated in 4 territories in 2 states and 1 country.

 

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 nine months ended June 30, 2018 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.

 

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 and $118,000 at June 30, 2018 and September 30, 2017, 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 (see Note 4).

 

Accounts and Notes Receivable

 

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, 2018 and September 30, 2017 are adequate, but actual write-offs could exceed the recorded allowance.

 

 

Property, Equipment and Depreciation

 

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

 

Fixed Assets	Useful Life
Equipment	5 years
Furniture and Fixtures	5 years
Property and Improvements	15-40 years
Software	3 years

 

Revenue Recognition

 

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

 

Since the Company’s franchises are primarily a mobile concept and do not require finding locations or construction, the franchisees can begin operations as soon as they complete training. The Initial Franchise Fees are fully collectible and nonrefundable as of the date of the signing of the franchise agreement, but the franchise fees are not recognized as revenue until initial training has been completed and when substantially all of the services required by the franchise agreement have been fulfilled by the Company in accordance with ASC Topic 952-605 Revenue Recognition-Franchisor.

 

As described under Recent account pronouncements below, the adoption of Topic 606 will have a significant impact on the recognition of revenue with repect to franchise sales.

 

Royalties are recognized as earned on a monthly basis.

 

Advertising Costs

 

Advertising costs are expensed as incurred. The Company incurred advertising costs for the quarters ended June 30, 2018 and 2017 of approximately $16,000 and $1,000, respectively.

 

Income Taxes

 

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

 

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

 

When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained 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, 2018 and September 30, 2017, respectively, and has not recognized interest and/or penalties during the three months ended June 30, 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.

 

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”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. Topic 606 is based on principles that govern the recognition 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 evaluating the impact of adopting the new revenue standard on its consolidated financial statements. Under the prior revenue recognition rules, the Company generally recorded revenue for initial franchise sales up front upon the completion of the sale transaction and corresponding training obligations. Under Topic 606, franchise sales revenue is generally deferred and recognized over the life 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.

 

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 2016-02, “Leases“, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. The new standard will become effective for the Company beginning with the first quarter 2020 and requires a modified retrospective transition approach including 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, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods 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. Early adoption is permitted, but no earlier than an entity’s adoption date of ASU 2014-09. The Company is currently evaluating the impact the adoption of this accounting guidance will have on the consolidated 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.

 

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, 2018, 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, 2018 and September 30, 2017, the Company held certain notes receivable totaling approximately $91,000 and $95,000, respectively, for extended payment terms of franchise fees. The Company only writes off franchisees’ receivables in the event that they leave the network. In addition, 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.

 

The marketing fund amounts are accounted for as a liability on the balance sheet and the actual collections are deposited into a marketing fund bank account. Expenses pertaining to the marketing fund activities are paid from the marketing fund and reduce the liability account.

 

At June 30, 2018 and September 30, 2017, the accrued marketing fund liability balances were approximately $85,000 and $132,000, respectively.

 

(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 29^th and 31^st, 2017, the Company issued an aggregate of 14,286 shares of Common Stock to two Directors of the Company. These shares were issued in conjunction with the issuance of lines of credit from the two directors. The fair value of the shares 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.

 

(7) Commitments and Contingencies

 

Lease Commitments

 

Rent expense was approximately $5,000 and $3,000, respectively, for the three months ended June 30, 2018 and 2017, and $14,000 and $12,000, respectively, for the nine months ended June 30, 2018 and 2017.

 

Litigation

 

Except as disclosed in the Company’s Form 10-Q for 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, for the year ended September 30, 2017.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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, the Company had 497 Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 31 Bricks 4 Kidz master franchises, and 119 Bricks 4 Kidz sub-franchises operating in 46 countries.

 

Three Months Ending June 30, 2018 Highlights

 

The Company experienced an increase in new franchise sales of approximately $60,000 during the quarter ended June 30, 2018, as compared to the quarter ended June 30, 2017. Accordingly, revenues were $618,047 for the three months ended June 30, 2018 compared with $551,657 in the three months ended June 30, 2017. The Company sold a new domestic franchise, a new international master franchise, as well as a new international sub-franchise in the current quarter. In the quarter ended June 30, 2017, the Company only added one international sub-franchise.

 

Operating expenses decreased to approximately $483,000 in the quarter ended June 30, 2018 from approximately $953,000 in the quarter ended June 30, 2017, or $470,000, due mostly to 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 was due to stock grants and stock option grants made to board members and officers of the Company in the quarter ended June 30, 2017, while none were made in the current quarter. The decrease in professional fees was due to 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 had net income for the quarter ended June 30, 2018 of $114,172 compared to a net loss of $831,524 in the quarter ended June 30, 2017.

 

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, the Company was not able to sell franchises in the United States, and at the same time the Company had significant professional fees and regulatory cash outlays which put adverse pressure on the Company’s liquidity. The Company believes its cash outlays related to professional fees and regulatory functions have been returning to traditional levels for a similar business. The Company will explore all options to improve liquidity.

 

The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements 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.

 

The Company has entered into Letters of Credit agreements with two Directors for the benefit of 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.

 

Cash funds are used for ongoing operating expenses, the purchase of equipment, property improvement, and software development. During the nine months ended June 30, 2018, the Company purchased property and equipment totaling approximately $117,000. The majority of the funds, approximately $92,000, were spent 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.

 

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, under the supervision and with the participation of our management, including our Chief Operating Officer/Chief Financial Officer, who serves as our Principal 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 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.

 

  

PART II

 

Item 1. Legal Proceedings

 

Except as disclosed in the Company’s Form 10-Q for 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, for the year ended September 30, 2017.

 

Item 1A. Risk Factors

 

Not applicable.

 

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 annual report on Form 10-K for the fiscal year ended September 30, 2017.

 

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

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

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

  

  

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

  

 

EXHIBIT INDEX

 

Exhibit No.		Exhibit
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