NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Business description

Casa Franchising, LLC (the Company), located in St. Louis Park, Minnesota, is a Minnesota limited liability company formed on June 20, 2016. The Company offers franchises for the establishment, development, and operation of Spanish immersion intercultural early childhood learning centers that provide educational programs to children between six weeks and five years of age. These centers are operated under the Casa de Corazon® service mark and logo.

Basis of presentation

The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) as codified by the Financial Accounting Standards Board.

Franchising

The Company executes franchise agreements that set the terms of its arrangement with each franchisee. The agreements cover a ten-year period. The franchise agreements require the franchisee to pay an initial, nonrefundable fee of $70,000. Each franchisee is required to pay a monthly royalty fee of 7% of monthly gross revenue. Each franchisee is also required to pay a monthly brand fund fee of 2% of monthly gross revenue and a monthly technology fee of $500. The monthly royalty fees and the monthly brand fund fees become due following the first full month after the commencement of operations. Subject to the Company's approval and payment of a renewal fee totaling $7,500, a franchisee may generally renew its agreement upon its expiration subject to satisfaction of certain conditions. Direct costs of sales and servicing of franchise agreements are charged to operating expenses as incurred.

Revenue recognition

The Company accounts for revenue in accordance with FASB ASU No. 2019-09, Revenue from contracts with Customers (Topic 606), implemented from inception.

Performance obligations

ADDENDUM TO CASA DE CORAZON DEVELOPMENT AGREEMENT FOR THE STATE OF MINNESOTA

Notwithstanding anything to the contrary set forth in the Casa de Corazon Development Agreement, the following provisions shall supersede any inconsistent provisions and apply to all Casa de Corazon franchises offered and sold in the State of Minnesota or if the Casa de Corazon business will be located in the State of Minnesota.

This Minnesota Addendum is only applicable if Developer is a resident of Minnesota or if Developer's business will be located in Minnesota.

The Minnesota Department of Commerce has imposed a financial assurance requirement due to our financial condition.

Therefore, we have obtained a surety bond in accordance with Minnesota Rules 2860.1900.

A copy of the surety bond is on file with the Minnesota Department of Commerce.

Minnesota Statutes, Section 80C.21, and Minnesota Rules 2860.4400(J) prohibit Franchisor from requiring litigation to be conducted outside Minnesota, requiring waiver of a jury trial, or requiring Developer to consent to liquidated damages, termination penalties, or judgment notes.

In addition, nothing in the Development Agreement can abrogate or reduce (a) any of Developer's rights as provided for in Minnesota Statutes, Chapter 80C; or (b) Developer's rights to any procedure, forum, or remedies provided for by the laws of the jurisdiction.

With respect to franchises governed by Minnesota law, Franchisor will comply with Minnesota Statutes, Section 80C.14, subd. 3-5, which require (except in certain specified cases) (a) that Developer be given 90 days' notice of termination (with 60 days to cure) and 180 days' notice for nonrenewal of the Development Agreement; and (b) that consent to the transfer of the franchise will not be unreasonably withheld.

Minnesota Rules 2860.4400(D) prohibits Franchisor from requiring Developer to assent to a general release.

Developer cannot consent to Franchisor obtaining injunctive relief.

Franchisor may seek injunctive relief.

Development Agreement, Section 7(i), is revised to comply with Minnesota Statutes, Section 80C.17, subd. 5.

2 GRANT OF DEVELOPMENT RIGHTS

• (a) Development Rights. Subject to the terms and conditions of this Agreement, and provided that Developer is in full compliance with this Agreement, Franchisor grants Developer the right to develop the number of Franchised Business(es) set forth on and pursuant to the development schedule included on the Rider attached hereto (the "Development Schedule"), within the geographic area described on the Rider attached hereto (the "Development Territory"). Time is of the essence for the development of each Franchised Business in accordance with the Development Schedule.

• (b) Exclusions to Development Schedule. Developer acknowledges and agrees that the following shall not be added or count towards the calculation to determine whether Developer has satisfied any cumulative number of Franchised Businesses required to be opened as provided in the Development Schedule:

  • (1) any business that operates under any marks or names other than Casa de Corazon;
  • (2) any Casa de Corazon early childhood learning center developed outside of the Development Territory; or
  • (3) any Franchised Business Developer (and/or its Affiliate) owns that is located inside of the Development Territory that is closed within six (6) months of the date it opens (regardless of the reason for such closure). Developer (and/or its Affiliate) may not close any Franchised Business without Franchisor's prior written consent.

• (c) Development Territory.

Provided Developer and its Affiliates are in full compliance with this Agreement (including with respect to the cumulative number of Franchised Businesses opened and in operation as required by the Development Schedule) and all other agreements between Developer (or any of its Affiliates) and Franchisor (or any of Franchisor's affiliates), including any franchise agreement between any of the foregoing parties, then, during the Term only, except as otherwise provided in this Agreement, neither Franchisor nor any of its affiliates will operate, or authorize any other party to operate, a Spanish immersion intercultural early childhood learning center under the Casa de Corazon mark, that is physically located within the Development Territory.

Source: Item 23 — RECEIPTS (FDD pages 51–215)