SecondForge

I believe Creative Learning Corporation (OTC: CLCN) is a good buy at $0.10/share, where it is currently trading.

Creative Learning Corporation is the franchisor of two franchises that provide educational programming and activities for K-12 students - Bricks4Kidz and Sew Fun Studios. Bricks4Kidz is the only meaningful franchise with more than 400 franchisees; Sew Fun only has one or two franchises. Bricks4Kidz is a series of educational after school programs for kids that use Lego bricks.

The stock traded as high as $3.00 per share in 2015 (market cap of approximately $30m), when the company, under previous leadership, was doing up to $12 million per year in franchise fees. Today, after years of decline, the company does about $2m per year of revenue, but is trading a hair below $0.10 per share (approximately $1.2m market cap).

The intervening years were not kind to the company - the founder was ousted; the replacement CEO was sanctioned by the SEC. In 2017 a takeover ousted the previous CEO, Brian Pappas, and replaced him.

Under the previous CEO, Blake Furlow’s, leadership, the company fell behind on SEC reporting, which prevented the company from selling new franchises. Franchisees were not communicated with. The company moved its headquarters to Idaho from Florida, for unclear reasons.

But on December 18th and 27th of 2019, through Q1 and Q2 2019 10-Qs were filed - giving hope that the Q3 2019 10-Q is on the way shortly. With the 2019 10-K not due until March or April, the company may be current soon - and hence able to sell franchises again. Furlow resigned, and one of the other board members, Bart Mitchell, took the helm. I’ve actually been able to get him on the phone, which is a great improvement.

I bought some shares of CLCN in 2017 for about $0.25 per share, before the company went non-current. Since then, I’ve called their corporate office at least once per month to make sure that the company is still operating. During that time the price went as low as $0.03 per share. With the recent progress, and return of some SEC filings, I’ve picked up many more shares as the market was slow to react to the filings. So far, so good. But there’s more room to go here.

Fundamental Value

The Q1 and Q2 2019 10-Qs show positive cashflow of more than $200k per year annualized, and a revenue run rate, while declining, of about $2m per year. At 10x cash flow, or 1x revenue then, the company is worth $2m - $0.15 per share or so, a 50% premium to current values.

Even if the company continues to lose revenue, it could still throw off a million dollars of cash before it dies, in theory about $0.07 per share. And that is a real possibility - the curriculum hasn’t been updated in at least 5 years, which is a serious issue for a franchise like this.

There is a group that’s currently attempting to wage a proxy fight, but the proxy group only owns 6% of the shares, and the current board owns about 30%. For a company that most holders have probably forgotten about, there’s little reason to believe the takeover will succeed.

But things could be so much better than that -

Future Possibilities

The company has been unable to sell new franchises because of the delay in SEC filings. Now that that is solved, the company can sell franchises again. That’s a catalyst if I ever heard one.

Second, the company has alluded to some new curriculum and program releases that are coming out soon. This could be another reason for growth, if they work.

If the company can start growing again, and is already achieving a 10% cash return on equity, fair valuations could be many multiples of current prices.

From speaking to Mr. Mitchell, the board is realistic about the problems and is working on them. Importantly, they are open to adding an outside board member from the shareholders, and a board member chosen from the franchisees. It’s a bit of a long shot, but the elements for a real turnaronud are here.

External Catalysts

One final element - if you look at the 10-Qs, the company is reporting a GAAP net income of about $0.14/share.

This is almost entirely because of an accounting rule change that forces the company to recognize long-paid revenue from franchise sales over time.

But anyone who doesn’t read closely may miss this, think the fair value is near $1 per share, and bid up the price significantly. For a thinly-traded stock like this, just a little extra interest can drive the price high quickly.

Disclosure

I own shares of CLCN and do intend to purchase more over the next several weeks.