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 March 31,June 30, 2021

☐ 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)

475 W Townplace, Suite A

St Augustine, FL32092

 (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 ☒ 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 ☒ 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.

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: 13,175,838  shares of common stock as of April 30,August 13,, 2021.

CREATIVE LEARNING CORPORATION

FORM 10-Q

Period Ended March 31,June 30, 2021

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, 2020 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 Sheets

The 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 unaudited financial statements.

Creative Learning Corporation

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) (Unaudited)

For the three months ended March 31,June 30, 2021 

For the sixnine months ended March 31,June 30, 2021

For the three months ended March 31,June 30, 2020

For the sixnine months ended March 31,June 30, 2020

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

CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

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

CREATIVE LEARNING CORPORATION

Notes to Condensed Consolidated Unaudited 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 March 31,June 30, 2021, BFK franchisees operated in 496 territories in 35 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 months and sixnine months ended March 31,June 30, 2021 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, 2020.

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.

Cash, Restricted Cash and Cash Equivalents

The Company had restricted cash of approximately $14,000$9,000 8,689 and $20,000 20,194at March 31,June 30, 2021 and September 30, 2020, respectively, associated with marketing funds collected from the franchisees. Per the franchise agreements a marketing fund of 2%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” or “marketing fund receivable” on the balance sheet.

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 March 31,June 30, 2021 and September 30, 2020 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

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 years 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 marketing 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). Upon entering into a franchise agreement, the Company charges 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.

Per the terms of the franchise agreements, the Company charges 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, which is managed by the Company, to allocate towards national branding of the Company’s concepts to benefit the franchisees. Lastly, 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 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 sixnine months ended March 31,June 30, 2021 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 March 31,June 30, 2021 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 presents these marketing fund revenues and expenses on a gross basis on its statement of operations. Any unused funds at the end of the period are recorded as accrued marketing fees or any funds used in excess of funds collected are recorded as a marketing fund receivable. The Company expects to collect this advance in future periods from the 2% fees collected on future franchisee gross revenues. The activity in the accrued marketing fund liability account for the sixnine months ended March 31,June 30, 2021 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, it capitalized the value of sales commissions as a contract asset and is amortizing those costs straight-line over the contract life of the franchise agreement to which they relate. During the sixnine months ended March 31,June 30, 2021, the activity in the contract asset account was as follows:

General Advertising Costs

General advertising costs are expensed as incurred. The Company incurred general advertising costs for the three months and sixnine months ended March 31,June 30, 2021 of $915$7,927 15,509 and $2,639,$10,566, 18,148 respectively and $3,417$658 and $5,305,$5,963, for the quarterthree and sixnine months ended March 31, 2020.June 30, 2020, 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. 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 sixnine months ended March 31,June 30, 2021.

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 no0 accrual for interest or penalties at March 31,June 30, 2021 and September 30, 2020, respectively, and has not0t recognized interest and/or penalties during the sixnine months ended March 31,June 30, 2021, since there are no0 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 2015 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.

During the sixnine months ended March 31,June 30, 2021, the Company issued 150,000 shares to a vendor in exchange for professional services and expensed $30,000$30,000 in connection with the stock issuance.

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

All newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.

(2) Notes and Other Receivables

At March 31,June 30, 2021 and September 30, 2020, the Company held certain notes receivable totaling approximately $8,000$7,000 and $9,000,$9,000, respectively, net of allowances, for extended payment terms of franchise fees. The notes receivable bear interest of 4%4% per annum with monthly payments, payable within four years. The Company analyzes the collectability of all receivables and reserves accordingly.

(3) Commitments and Contingencies

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 seekssought 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 havehad returned certain Company documents that they have identified, but other issues remain.remained. On December 11, 2017, Brian Pappas filed a counterclaim alleging the Company is required to indemnify him for a multitude of matters. On October 8, 2020 the Court dismissed Brian Pappas’ indemnity counterclaim without prejudice.prejudice

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”) filed suit against the Company alleging 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. The Company is actively litigating this matter. On October 27, 2016, Brian Pappas filed a motion to amend the complaint in Case No. CA 16-236 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 granted the right to amend his complaint and does so, the Company will vigorously defend the proposed claim.

 The Company’s complaint against Mr. Pappas and Franventures (Case No. CA 15-1076) has beenwas consolidated with Mr. Pappas’ and Franventures’ complaint against the Company (Case No. CA 16-236) for purposes of discovery, but not for any other purpose.

On May 22, 2021, the Company, Brian Pappas, Christine Pappas and Franventures entered into an agreement under which the parties agreed to mutually release all parties from any claims or causes of action that they have against the other, including without limitation any claims asserted in Case No. CA 15-1076 and Case No. CA 16-236. The Company agreed to pay Brian Pappas and his assigns 60 consecutive, monthly payments of $4,000 commencing on June 1, 2021 and continuing through June 1, 2026.

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, as well as four other defendants seeking damages under the New York Franchise Sales Act. The same Plaintiffs also initiated an arbitration proceeding against the Company 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 in the arbitration case. Both cases have 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). The Plaintiffs allege breach of contract, fraud, misrepresentations and omissions, violations of the Indiana Franchise Act, and violations of the Indiana Deceptive Franchise Practices Act. On April 23, 2020, a settlement agreement was entered into between the Plaintiffs and the Company under which the arbitration was dismissed. Pursuant to 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 franchise management software.

(4) Sale of Condominium

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

(5) Related Party Transactions

Christopher Rego has been a director since February 5, 2020, and our Chief Executive Officer since May 1, 2020. Prior to his appointment, Mr. Rego purchased an active franchise in California. During the sixnine months ended March 31,June 30, 2021 the Company recognized royalty revenue from the franchise of $7,875$6,828 and recognized marketing fee revenue from the franchise of $0.$0. Total payments made by the franchisee were $2,834.$6,265. As of March 31,June 30, 2021 and September 30, 2020 the accounts receivable balance with the franchisee was $3,143$18,081 and $11,894,$11,894 , respectively and the franchisee had a deferred revenue balancesbalance of $0.$0.

ChristopherMr. Rego our chief executive officer, is also the CEO of Teknowland, a software development company, with which the Company entered into an agreement on March 10, 2020 to perform development and maintenance services in relation to the Company’s franchise management software. The term of the agreement iswas six months, subject to auto-renewal until Teknowland had completed its obligations under the agreement, but subject to each party’s right to terminate the agreement at any time on 30 days’ notice. Under the agreement, the Company was obligated to pay Teknowland a fee of $12,900 $12,900per month for development and maintenance services. Starting in November 2020, the Company and Teknowland orally agreed to reduce the monthly amount that the Company is obligated to pay to $3,000$3,000 per month.

During the year ended September 30, 2020, the Company and Mr. Rego orally agreed that Mr. Rego and Teknowland would develop an eLearning program to enable the Company to offer educational programs over the internet. No agreement was reached regarding whether the Company or Teknowland would own the eLearning program, or the terms under which the Company would be entitled to use the program on a long-term basis, whether as owner or licensee. The Company orally agreed to pay Teknowland $10,000 per month for five months for hosting and content costs incurred by Teknowland of which $40,000 has been paid.. After testing the program, the Company’s board decided in December 2020 not to pursue the E-Learning program.

Beginning in January 2021, Teknowland began hosting the Company’s website at a cost of $5,000$5,000 per month pursuant to an oral agreement.

On February 12, 2021, the Company, Chris Rego and Teknowland entered into an agreement under which the parties mutually agreed to terminate the March 10, 2020 agreement to develop and maintain the Company’s franchise management system, and the oral agreement under which Teknowland hosted the Company’s website. In both cases, the Company has engaged an independent firm to provide the services. Under the same agreement, the Company agreed to transfer and assign to Teknowland all of the Company’s rights in anthe E-Learning program developed by Teknowland for the Company. The Company evaluated the E-Learning program on a trial basis, and elected not to pursue it as a line of business. The Company agreed to pay Teknowland $50,000$50,000 to pay all invoices associated with the two agreements and the E-Learning program, of which $20,000 was payable at execution of the agreement, $20,000 was payable 30 days later and $10,000 was payable 60 days later. As of March 31,June 30, 2021 $20,000$20,000 has been paid and $30,000$30,000 is still owed.

 During the sixnine months ended March 31,June 30, 2021, JoyAnn Kenny-Charlton, a director of the Company, agreed to relinquish 272,472 shares previously approved for issuance to her for director services.

(6) Subsequent Events

 None.On July 20, 2021, the Company entered into an Agreement to acquire the remaining 51% of Bricks4Schoolz, LLC (“Bricks4Schoolz”) that it did not own. Consideration for the purchase includes payment of $108,000 payable in twelve payments of $9,000 monthly beginning on August 1, 2021 and continuing through July 31, 2022, and 300,000 shares of the Company’s restricted stock. In addition, the principles of the Bricks4Schoolz agreed to assign any rights that they had to proprietary software and content developed for Bricks4Schoolz. In July 2019, the company had acquired a 49% interest in Bricks4Schoolz by entering into an operating agreement with the owner of the 51% interest. As part of the acquisition, the Company and the sellers of the 51% interest in Bricks4Schoolz entered into mutual releases of liability. The Company is currently evaluating the impact of this acquisition, therefore, as of the date of this filing the accounting for this transaction is not yet complete and the disclosures have yet to be finalized.

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. As of March 31,June 30, 2021, the Company had 496 Bricks 4 Kidz® and Sew Fun Studios® franchise territories, 28 Bricks 4 Kidz® master franchises, and 141 Bricks 4 Kidz® sub-franchises operating in 40 countries.

The Company 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. 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 has completed all required financial statements, and expects to update its FDDs shortly to resume new franchise sales. However, the resumption of new franchise sales may be further delayed due to disruptions caused by the COVID-19 pandemic. At this time, the Company is unable to predict when it will resume new franchise sales.

Three and SixNine Months ended March 31,June 30, 2021 and 2020

Revenues were $710,007$462,629 and $1,467,015$1,929,644 during the three and sixnine months ended March 31,June 30, 2021, respectively, as compared to $848,816$621,690 and $1,638,036$2,259,726 during the three and sixnine months ended March 31,June 30, 2020, respectively. The drop in gross revenues in 2021 as compared to 2020 is mainly attributable to decreases in royalty fees and marketing fund revenue, which was offset by an increase in initial franchise fees caused by the offboarding of existing franchisees. The decline in revenues in 2021 as compared to 2020 was mainly the result of the impact of the Coronavirus (“COVID-19”) pandemic on our business.

Initial franchise fees were $350,104$263,854 and $739,108$1,002,962 during the three and sixnine months ended March 31,June 30, 2021, respectfully, as compared to $238,278$221,347 and $498,971$720,318 during the three and sixnine months ended March 31,June 30, 2020, respectively. The increase in initial franchise fees during the three and sixnine months ended March 31,June 30, 2021 was primarily due to the acceleration of deferred revenues in 2021 due to the offboarding of franchisees during the sixnine months ended March 31,June 30, 2021, which was partially offset by fewer new franchise sales due to the COVID-19 pandemic.

Royalty fee revenues were $304,582$183,491 and $636,474$819,965 during the three and sixnine months ended March 31,June 30, 2021, respectively, as compared to $465,515$342,010 and $906,457$1,248,467 during the three and sixnine months ended March 31,June 30, 2020, respectively. Royalty fee revenues decreased as compared to the comparative periods due to the offboarding of franchisees during the year ended September 30, 2020, and the sixnine months ended March 31,June 30, 2021, which resulted in fewer franchisees being charged royalties in the current period versus the same period of the prior year. In addition, royalty fee revenues were lower because of the interruption of normal operation at many franchises because of the COVID-19 pandemic.

Marketing fund revenues were $0 during the sixthree and nine months ended March 31,June 30, 2021, as compared to $146,794$12,979 and $159,773 during the sixthree and nine months ended March 31, 2020.June 30, 2020, respectively. The Company had no marketing fund revenue in the current period due to the impact of COVID-19. In particular, due to the impact of the COVID-19 pandemic on the business of our franchisees, we voluntarily elected to cease charging our franchises for marketing fees in March 2020. The Company expects to resume charging franchisees for marketing when they are able to return to normal operations following the COVID-19 pandemic.

Technology fees were $55,321$15,284 and $91,433$106,717 during the three and sixnine months ended March 31,June 30, 2021, respectively, as compared to $56,331$45,354 and $85,814$131,168 during the three and sixnine months ended March 31,June 30, 2020, respectively. Technology fees increaseddecreased during the sixnine months ended March 31,June 30, 2021 over the comparative prior period due to the Company charging franchisees fordue to the useimpact of the Company’s online platform.COVID-19.

Operating expenses were $528,870$586,677 and $1,064,357$1,651,034 during the three and sixnine months ended March 31,June 30, 2021, respectively, as compared to $589,849$624,391 and $1,098,717$1,723,108, respectively during the three and sixnine months ended March 31, 2020, respectively.June 30, 2020. Operating expenses declined in 2021 as compared to 2020 primarily due to lower marketing fund expenses, payroll expenses and professional expenses, which was offset to some extent by materially higher bad debt expense and higher franchise commissions in 2021 as compared to 2020. Bad debt expense increased in 2021 as a result of financial distress experienced by many of our franchisees as a result of the impact of the COVID-19 pandemic on their businesses. Franchise commissions increased as a result of the offboarding of franchisees.franchisees, which triggered the recognition of prepaid commissions into expense.

Net income (loss) for the three months and sixnine months ended March 31,June 30, 2021 was approximately $181,000$(123,000) and $405,000,$281,000, respectively as compared to approximately $256,000$(3,000) and $555,000$552,000 in the three and sixnine months ended March 31, 2020, respectively.June 30, 2020. The decrease in net income in the sixnine months ended June 30, 2021 as compared to June 30, 2020 was a result of lower revenues partially offset by lower expenses. The lower revenues were due to more offboards of franchises in fiscal 2020, and the sixnine months ended March 31,June 30, 2021, and the lack of new franchise sales, which resulted in lower royalty fee revenue in the current period. However, lower royalty fee revenue was partially offset by the higher recognition of deferred revenue in the current period. The lower expenses, as explained above, were due to lower marketing fund, payroll and professional expenses.

Liquidity and Capital Resources

The Company’s primary source of liquidity is cash generated through operations. As of March 31,June 30, 2021, the Company had approximately $393,000$380,000 of unrestricted cash, and used cash flow from operations of approximately $39,000$58,000 in the sixnine months ended March 31,June 30, 2021. The Company believes it has sufficient cash on hand to cover expenses for the next 12 months.

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

The recent COVID-19 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 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 and our ability to sell new franchises. 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 six months ended March 31, 2020, 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 the date of sale.

On March 31, 2021, the Company issued 150,000 shares to a vendor in exchange for professional services. The Company expensed $30,000 in connection with the stock issuance during the six months ended March 31, 2021.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to us as a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure 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 March 31,June 30, 2021, under the supervision and with the participation of our management, including our President 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, 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.

Changes in Internal Control Over Financial Reporting

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. During the period ending March 31,June 30, 2021, the Company discovered that it lacked controls to ensure that all sources of revenue are properly deposited in the Company’s accounts, and that any changes require the signature of two or more officers. The Company is conducting a review of all banking and payment processing relationships to ensure that the proper controls are in place, and expects to remediate the deficiency shortly.  Other than the change identified earlier in this paragraph, there was no change in our internal control over financial reporting that occurred during the quarter ended March 31,June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The Company continues to have the following material weaknesses in internal control:

Management believes that despite our material weaknesses, our consolidated financial statements for the quarter ended March 31,June 30, 2021 are fairly stated, in all material respects, in accordance with GAAP.

PART II

Item 1. Legal Proceedings

The discussion of pending legal matters included in Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020 is incorporated herein by reference. There

On May 22, 2021, the Company, Brian Pappas, Christine Pappas and Franventures entered into an settlement agreement under which the parties agreed to mutually release each other from any claims or causes of action that they have against the other, including without limitation any claims asserted in a lawsuit filed by the Company against Brian Pappas, Christine Pappas, and Franventures, LLC (“Franventures”), a company controlled by Mr. Pappas, in the state court of St. John’s County, Florida, Case No. CA 15-1076, and a lawsuit filed by Franventures against the Company, with Mr. Pappas named as a third party defendant, in the state court in St. John’s County, Florida, Case No. CA 16-236. Under the settlement agreement, the Company agreed to pay Brian Pappas and his assigns 60 consecutive, monthly payments of $4,000 commencing on June 1, 2021 and continuing through June 1, 2026.

Other than as disclosed above, there have been no material changes in legal proceedings since the filing of the Form 10-K.

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 the Company’s most recent annual report on Form 10-K.

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

During the six months ended March 31, 2021, the Company issued 150,000 shares of common stock for consulting services valued at $30,000. The shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933.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

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.

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