The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
Notes to 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 December 31, 2017, BFK franchisees operated in 641 territories in 40 states and 45 countries,
and SF franchisees operated in 10 territories in 5 states and 2 countries.
Basis of Presentation
The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States for interim financial information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required for complete financial statements. In the opinion of management,
these consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of
the Company’s results for the interim periods that have been included. The results for the three months ended December 31,
2017 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.
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.
Restricted Cash
The Company had restricted
cash of approximately $119,000 and $118,000 at December 31, 2017 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 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 December 31, 2017 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 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.
Initial Franchise
Fee - Since the Company’s franchises are primarily a mobile concept and do not require finding locations or construction,
the franchisees can begin operations as soon as they complete training. The 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
. Royalties are recognized as earned on a monthly basis.
Royalties - 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 December 31, 2017 and 2016 of approximately
$3,000 and $12,000, 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 December 31, 2017 and September 30, 2017, respectively, and has not recognized interest and/or penalties
during the three months ended December 31, 2017, 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 2013 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 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 agreements. 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 regards 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 March 2016 the FASB
issued ASU No. 2016-09, C
ompensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
which is intended to improve and simplify several aspects of the accounting for employee share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit
in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting
period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes
payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating
activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number
of awards that are expected to vest or account for forfeitures when they occur. The Company has adopted this standard, and there
was no material effect on the consolidated financial statements.
In November 2016, the
FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task
Force)”. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the
total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore,
amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 becomes
effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating
the impact ASU 2016-18 will have on its consolidated financial statements.
In February 2016, the
FASB issued ASU No. 2016-02, “Leases”, 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 and includes a number of practical expedients. Early adoption of the standard
is permitted. The Company is currently evaluating the impact the adoption of this accounting guidance will have on the consolidated
financial statements.
(2) Related Party Transactions
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 December 31, 2017, no amounts were outstanding on these lines of credit.
(3) Notes and Other Receivables
At December 31, 2017
and September 30, 2017, respectively, the Company held certain notes receivable totaling approximately $89,000 and $95,000 respectively
for extended payment terms of franchise fees, generally non-interest bearing notes with monthly payments, payable within one to
two years. 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
|
|
$
|
30,184
|
|
|
$
|
15,763
|
|
|
$
|
12,950
|
|
|
$
|
12,950
|
|
|
$
|
12,950
|
|
|
$
|
4,537
|
|
|
$
|
89,334
|
|
(4) Accrued
Marketing Fund
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.
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 December 31, 2017
and September 30, 2017, the accrued marketing fund liability balances were approximately $116,000 and $132,000, respectively.
(5) Accrued Liabilities
The Company had accrued liabilities
at December 31, 2017, and September 30, 2017 as follows:
|
|
December 31,
|
|
|
September 30,
|
|
Accrued Liabilities
|
|
2017
|
|
|
2017
|
|
Accrued Legal Fees
|
|
|
19,058
|
|
|
|
77,719
|
|
Accrued Legal Settlements
|
|
|
80,429
|
|
|
|
32,143
|
|
Accrued Exit Agreement
|
|
|
—
|
|
|
|
9,739
|
|
Accrued Other
|
|
|
8,516
|
|
|
|
16,126
|
|
|
|
$
|
108,003
|
|
|
$
|
135,727
|
|
(6) Stock-Based Compensation
On December 29th and
31
st
, 2017, the Company granted 14,286 shares to Directors and Officers 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 December 31, 2017 and 2016.
Litigation
There are no matters
currently outstanding which the Company believes will have a material impact on its financial position or results of operations.