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 December 31, 2019, the Company had 501 Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 28 Bricks 4 Kidz® master franchises, and 138 Bricks 4 Kidz® sub-franchises operating in 40 countries.

1st Quarter FY 2020 Highlights

The decrease in 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 more offboards in the comparative period in which the deferred expense on the terminated contract was recognized immediately as per FASB ASC 606.

The net income for the quarter ended December 31, 2019 was $299,148 as compared to $698,540 in the quarter ended December 31, 2018. The decrease was primarily a result of more offboards in the comparative period in which the deferred revenues and expenses on terminated contracts were recognized immediately as per FASB ASC 606.

Liquidity and Capital Resources

The Company's primary source of liquidity is cash generated through operations. The 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 quarters ended December 31, 2019 and 2018, the Company purchased property and equipment totaling approximately $0 and $123,000.

On October 30, 2019 the Company completed the sale of a condominium conference space for proceeds of approximately $100,000 and recorded a gain of approximately $21,000, which represented the excess of the proceeds over the carrying value on that date.

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