UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ  Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

¨  Transition Report Pursuant To 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)

 

Delaware		20-4456503
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

701 Market St., Suite 113

St. Augustine, FL 32095

(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)

Indicate by check mark 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 þ  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 þ  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
Emerging growth company	o

 

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. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No þ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12,001,409 shares of common stock as of May 5, 2017.

 

 

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CREATIVE LEARNING CORPORTION

Form 10-Q

Quarter Ended March 31, 2016

		Page No.
	PART I
Item 1	Financial Statements	1
Item 2	Management's Discussion and Analysis of Financial Conditions and Plan of Operation	11
Item 3	Quantitative and Qualitative Disclosure About Market Risk	12
Item 4	Controls and Procedures	12
	PART II
Item 1	Legal Proceedings	13
Item 1A	Risk Factors	13
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3	Defaults Upon Senior Securities	13
Item 4	Mine Safety Disclosures	13
Item 5	Other Information	13
Item 6	Exhibits	13

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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”) 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:

 

·

discuss future expectations;

·

contain projections of future results of operations or financial condition; or

·

state other “forward-looking” information.

 

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 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:

·

the operating and financial results of and our relationships with our franchisees;

·

actions taken by our franchisees that may harm our business;

·

incidents that may impair the value of our brand;

·

our failure to successfully implement our growth strategy;

·

changing economic conditions;

·

our need for additional financing;

·

risks associated with our franchisees; and

·

litigation and regulatory issues; and

·

our failure to comply with current or future laws or regulations.

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.

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PART I

Item 1. Financial Statements

CREATIVE LEARNING CORPORATION

Consolidated Balance Sheets

		March 31,				September 30,
		2017				2016
		(Unaudited)
Assets
Current Assets:
Cash		$	410,511			$	276,685
Restricted cash (marketing fund)			196,929				162,447
Accounts receivable, less allowance for doubtful accounts of approximately $291,000 and $218,000, respectively			294,217				240,640
Prepaid expenses			121,880				120,000
Notes receivable - current portion, less allowance for doubtful accounts of approximately $37,000 and $26,000, respectively			44,470				16,595
Income tax receivable			—				424,938
Total Current Assets			1,068,007				1,241,305
Notes receivable - net of current portion			59,150				60,150
Property and equipment, net of accumulated depreciation of approximately $215,000 and $188,000, respectively			272,947				299,320
Intangible assets			100,504				100,504
Deposits			1,425				1,425
Deferred tax assets			420,402				343,444
Total Assets		$	1,922,435			$	2,046,148
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	371,539			$	171,828
Payroll accruals			18,569				15,844
Accrued liabilities			149,028				346,623
Unearned revenue			—				188
Accrued marketing fund			198,195				147,227
Customer deposits			5,000				5,000
Total Current Liabilities			742,331				686,710
Commitments and Contingencies - Note 7
Stockholders’ Equity:
Creative Learning Corporation stockholders' equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized; None issued and outstanding			—				—
Common stock, $.0001 par value; 50,000,000 shares authorized; 12,001,409 shares issued and outstanding			1,200				1,200
Additional paid-in capital			2,534,554				2,534,554
Treasury Stock 65,100 shares and 65,100 shares, respectively (cost method)			(34,626	)			(34,626	)
Accumulated deficit			(1,321,024	)			(1,141,690	)
Total Stockholders’ Equity			1,180,104				1,359,438
Total Liabilities and Stockholders’ Equity		$	1,922,435			$	2,046,148

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

1

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CREATIVE LEARNING CORPORATION

Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended								For The Six Months Ended
		March 31,				March 31,				March 31,				March 31,
		2017				2016				2017				2016
Revenues:
Initial franchise fees		$	10,313			$	97,700			$	140,313			$	480,400
Royalties fees			571,472				544,282				1,180,298				1,106,503
Merchandise sales			—				160				60				213
			581,785				642,142				1,320,671				1,587,116
Operating expenses:
Franchise consulting and commissions			25,795				58,481				110,860				211,171
Franchise training and expenses			18,466				70,824				45,097				150,411
Salaries and payroll taxes			183,524				268,035				342,801				597,109
Advertising			9,815				244,913				21,919				397,240
Professional fees and legal settlements			460,971				869,445				858,742				1,786,923
Office expense			2,940				7,658				4,825				26,170
Bad debt expense			61,739				32,954				103,431				48,810
Depreciation			13,727				13,161				27,453				22,683
Other general and administrative expenses			37,164				195,416				77,108				354,529
Total operating expenses			814,141				1,760,887				1,592,236				3,595,046
Loss from operations			(232,356	)			(1,118,745	)			(271,565	)			(2,007,930	)
Other income (expense):
Interest income - net			36				1,120				39				2,858
Other income (expense)			1,802				(18,175	)			15,234				19,131
Total other income (expense)			1,838				(17,055	)			15,273				21,989
Loss before benefit from income taxes			(230,518	)			(1,135,800	)			(256,292	)			(1,985,941	)
Benefit from income taxes			71,722				407,433				76,958				734,593
Net loss from continuing operations		$	(158,796	)		$	(728,367	)		$	(179,334	)		$	(1,251,348	)
Discontinued operations
Operating loss from discontinued operations			—				(335	)			—				(12,221	)
Income tax benefit (provision)			—				(54	)			—				4,520
Loss from discontinued operations			—				(389	)			—				(7,701	)
Net loss		$	(158,796	)		$	(728,756	)		$	(179,334	)		$	(1,259,049	)
Net loss per share
Basic and diluted
Continuing operations		$	(0.01	)		$	(0.06	)		$	(0.01	)		$	(0.10	)
Discontinued operations		$	—			$	(0.00	)		$	—			$	(0.00	)
Total		$	(0.01	)		$	(0.06	)		$	(0.01	)		$	(0.10	)
Basic and diluted weighted average number of common shares outstanding			12,001,409				12,001,409				12,001,409				12,001,409

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

2

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CREATIVE LEARNING CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)

		For the Six Months Ended
		March 31,				March 31,
		2017				2016
Cash flows from operating activities:
Net loss		$	(179,334	)		$	(1,259,049	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss from discontinued operations			—				7,701
Depreciation			27,453				22,683
Bad debt expense			103,431				48,810
Deferred income taxes			(76,958	)			5,999
Changes in operating assets and liabilities:
Restricted cash			(34,482	)			91,794
Accounts receivable			(145,874	)			122,449
Prepaid expenses			(1,880	)			(23,722	)
Notes receivable			(38,009	)			34,970
Deposits			—				5,000
Accounts payable - related parties			—				787
Accounts payable - 3rd parties			199,711				338,714
Accrued liabilities			(197,595	)			(28,017	)
Unearned revenue			(188	)			80,000
Payroll accruals			2,725				(22,950	)
Accrued marketing			50,968				(87,735	)
Customer deposits			—				(9,982	)
Income tax receivable			424,938				(746,526	)
Net cash provided by (used in) operating activities			134,906				(1,419,074	)
Net cash provided by discontinued operations			—				19,462
Cash flows from investing activities:
Acquisition of property and equipment			(1,080	)			(69,076	)
Net cash used in investing activities			(1,080	)			(69,076	)
Net change in cash			133,826				(1,468,688	)
Cash, beginning of period			276,685				2,450,609
Cash, end of period		$	410,511			$	981,921
Supplemental disclosure of cash flow information:
Supplemental non-cash investing and financing activities
Acquisition of treasury stock in connection with disposition of CI			—				16,500

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

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CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

(1) Nature of Organization, Operations and Summary of Significant Accounting Policies:

Nature of Organization

Creative Learning Corporation (“CLC”) operates the 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, 2017, BFK franchisees operated in 615 territories in 44 states and 43 countries, and SF franchisees operated in 12 territories in 6 states and 2 countries.

The Company sold the Challenge Island Franchise Co., LLC (“CI”) concept on December 9, 2015, and as a result the Company is reporting CI as discontinued operations in the consolidated financial statements. See Note 6.

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 six months ended March 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, 2016. In addition, refer to Note 6 regarding the sale of CI and related discontinued operations classification.

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 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.

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, 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’s restricted cash is 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).

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CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

Accounts and Note Receivables

The Company reviews accounts and note receivables periodically for collectability and 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, 2017 and September 30, 2016 were 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

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.

Advertising Costs

Advertising costs are expensed as incurred. The Company incurred advertising costs for the quarters ended March 31, 2017 and 2016 of approximately $10,000 and $245,000, respectively. The Company is evaluating the effectiveness of pay for click advertising to generate franchise sales.

Income Taxes

The provisions 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.

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CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

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. 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 March 31, 2017 and September 30, 2016, respectively, and has not recognized interest and/or penalties during the three months ended March 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 by the weighted average number of common shares outstanding for the period. Diluted earnings 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.

Recent accounting pronouncements

Revenue from Contracts with Customers (Topic 606) has been discussed in several recent Accounting Standards Updates (“ASUs”), including ASU 2016-12, 2016-11, 2016-10 and 2016-8. In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 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. ASU 2014-09 will be effective for the Company beginning in its October 1, 2018 fiscal year. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The adoption of this standard is not expected to be material.

In March 2016 the FASB issued ASU No. 2016-09, Compensation - 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. This ASU is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period, however early adoption is permitted. The Company is currently assessing the impact that the adoption of ASU 2016-09 will have on its financial statements. Since the Company has no significant outstanding option agreements currently, the adoption of this standard is not expected to be material.

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.

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CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

Recent Events

On December 9, 2016, Brian Pappas, through his controlled company FranVentures, LLC (“FranVentures”), filed with the U.S. Securities and Exchange Commission (the “SEC”) a preliminary consent statement on Schedule 14A asking the shareholders of the Company to remove the current members of the Board of Directors and to replace them with three individuals proposed by Mr. Pappas. The Company announced on February 9, 2017 that the proxy contest of Brian Pappas and FranVentures has failed and that there will be no change in the Company's Board of Directors.

(2) Related Party

MC Logic, LLC (“MC Logic”) is 100% owned by Michelle Cote, who has served as the Company’s Creative Director since May 11, 2017 the Company’s President and Secretary from July 2015 until May 11, 2017, and is a former director and founder of the Company. Subsequent to the end of fiscal year 2015, the Company has recorded a related party receivable of $7,500 which resulted from activities that occurred in 2016. The receivable is a net amount due resulting from pre-approved activities at an MC Logic Sew Fun Franchise location, which involved using the space for initial evaluation of a potential new franchise concept and for the Company’s use of the location to consider taking the Sew Fun franchise as a company store. During this time, MC Logic had been reimbursed for expended funds and had tendered to the Company certain revenues. The Company later changed strategy, resulting in the reversal of reimbursements to MC Logic and the return of revenues to MC Logic. The net result was $10,218 due from MC Logic. MC Logic paid the balance in June of 2016. In addition, the Company has entered into an arrangement with MC Logic under which MC Logic has agreed to pay the standard Sew Fun Studios monthly royalty fee due for this territory effective June 1, 2016. The Company has a receivable of $1,750 due from MC Logic as of March of 2017 related to royalties.

The Company had $6,678 in rent expense for the six months ended March 31, 2016 for a 1,200 square foot MC Logic leased facility located in St. Augustine, Florida (the “Store”). This was a month to month arrangement with no lease in the Company’s name. The Company used the Store as a training center and expected to start holding classes and special events during evenings and weekends. This arrangement ended in March 2016.

(3) Notes and Other Receivables

At March 31, 2017 and September 30, 2016, the Company held certain notes receivables totaling approximately $140,000 and $102,000, respectively, for extended payment terms of franchise fees, generally non-interest bearing notes. 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.

		2017				2018				2019				2020				Thereafter				Total
Payment schedules for Notes Receivable		$	65,710			$	26,950			$	14,000			$	12,950			$	20,724			$	140,334

(4) Accrued Marketing Fund

Per the terms of the franchise agreements, the Company collects 2% of a 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 March 31, 2017 and September 30, 2016, the accrued marketing fund liability balances were approximately $198,000 and $147,000, respectively.

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CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

(5) Accrued Liabilities

The Company had accrued liabilities at March 31, 2017, and September 30, 2016 as follows:

		March 31,				September 30,
Accrued Liabilities		2017				2016
Accrued Audit Fees		$	10,000			$	13,753
Accrued Legal Fees and Legal Settlements			129,743				148,504
Accrued State Regulatory Settlement			—				149,366
Accrued Other			9,285				35,000
		$	149,028			$	346,623

(6) Discontinued Operations

In September 2015, management committed to a plan to sell the CI concept because it was not a strategic fit with the Company’s existing BFK franchise brand.

The Company executed a purchase and sale agreement on December 9, 2015. The sale included substantially all of the assets of the CI business, which were sold on an “as is where is” basis, with no Company representations or warranties surviving the consummation of the sale. The purchase price for the assets was $24,750 and consisted of the transfer to the Company of 50,000 shares of the Company’s common stock valued at $16,500 that had been held by the purchaser, reversal of an accrual to issue 25,000 shares of the Company’s common stock valued at $8,250 and the assumption of certain liabilities related to the acquired assets.

The following table lists the operating loss on the assets held for sale.

		Three months				Six months
		ended				ended
Operating Loss on discontinued operations		3/31/2016				3/31/2016
Revenue		$	(45	)		$	(6,016	)
Advertising and Promotion			—				(7,635	)
General and Administrative Expenses			(290	)			1,430
Operating Loss on discontinued operations		$	(335	)		$	(12,221	)

(7) Commitments and Contingencies

Lease Commitments

The Company entered into a commercial lease with Village Square at Palencia in July 2014, to lease unit 103B, Office Space 2, located at 701 Market Street, St. Augustine, Florida. On January 28, 2016, the Company provided a 60-day notice of termination for this lease that was accepted by the landlord. The fees and penalty for early termination was $2,000. The Company was required to vacate the suite by March 31, 2016.

Rent expense was approximately $6,000 and $17,000, respectively, for the three months ended March 31, 2017 and 2016.

Litigation

From time to time, the Company has been and may become involved in legal proceedings arising in the ordinary course of its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

During the relevant time period, the Company has settled two lawsuits that have appeared in prior filings for some time.

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CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

The Company settled a lawsuit brought by the former persons in interest of Sew Fun, LLC (SFLLC). The Company also settled a defamation suit brought by a former officer of the Company in relation to the Company’s statements in an SEC Form 8-K filing that the employee had been terminated. The Company has filed a corrected SEC Form 8-K. In the case of both settlements, the Company has negotiated financial terms to minimize impact upon the Company’s cash flow.

On October 2, 2015, the Company filed suit 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. Defendants’ counsel notified the Company on January 31, 2017 that they are seeking to withdraw from representing the defendants “due to irreconcilable differences with our clients”. Mr. Pappas has obtained replacement counsel, and discovery continues.

On October 7, 2016, a franchisee filed a demand for arbitration against the Company’s affiliate BFK Franchise Company, LLC alleging that BFK had engaged in contract breaches and fraud in relation to numerous franchise agreements signed by Brian Pappas, Managing Director, or Dan O’Donnell, VP Operations between September 22, 2012 and November 1, 2015, with all but 1 of the agreements executed by or before March 2, 2015. The Company intends to vigorously defend this suit.

On February 24, 2017, a franchisee filed a demand for arbitration against the Company’s affiliate, BFK Franchise Company, LLC, but at the same time the franchisee asked that the arbitration be held in abeyance to permit the parties to engage in mediation as is required under the franchisee’s Franchise Agreement with the Company. By agreement of the parties, however, mediation has been delayed to allow the parties to attempt to negotiate a settlement without incurring expenses for a mediator. In its mediation submission, the franchisee notes that it has separately filed suit in federal raising the same claims against Brian Pappas, FranVentures LLC (operated by Brian Pappas) and others the franchisee alleges to be “franchise brokers/agents” in federal district court. In the franchisee’s arbitration demand against BFK Franchise Company, the franchisee’s allegations all relate to franchise agreements entered into on February 24, 2014 and alleged violations of the New York Franchise Sales Act, including alleged pre-sale misrepresentations by Mr. Pappas and the alleged “franchise brokers/agents” as to expected earnings, profitability and “ROI” (return on investment) of the franchises and failure to disclose “SEC violations” by Mr. Pappas. Finally, the franchisee also states that it “may” bring claims for alleged violations of the Florida Franchise Act and the Florida Deceptive and Unfair Trade Practices Act as well as common law claims for negligent misrepresentation but does not offer any specifics as to the bases for such claims.

In April 2015, the United States Securities & Exchange Commission (“SEC”) issued a subpoena to Creative Learning Corporation seeking a variety of documents. The documents sought include without limitation materials regarding Brian Pappas, certain members of Mr. Pappas’ family, other company employees, board members and third-parties, company books and accounting procedures as well as other material regarding company affairs. In or about that time, it came to the attention of the Company that the SEC had initiated an investigation into possible violations of the securities laws by the Company and/or its officers, directors and/or others as of at least January 14, 2014. In late April 2015, the Company’s Board elected two new independent directors, and created an Audit Committee, which included the two new directors. In addition, in July 2015, the Board removed Brian Pappas as Chief Executive Officer. The Company has taken a number of steps to address compliance issues regarding its books and records. The Company is fully cooperating with the staff of the SEC in this matter. On January 8, 2017, the Company accepted a preliminary settlement proposal offered by the staff of the Enforcement Division of the SEC. As is standard in these situations, the SEC staff made clear that the proposal is not final and is subject to and contingent upon approval by the leadership of the SEC Enforcement Division and the Securities and Exchange Commission itself. If the proposed settlement is approved by the Commission, the SEC would: (1) impose no financial penalty against the Company and not order an internal monitor at the Company; and (2) make findings that the Company committed a series of federal securities law violations, all of which occurred during the time that Brian Pappas was the Company’s Chief Executive Officer and Chairman of the Board and which in most instances pertain to specific actions taken by and/or for the personal benefit of Brian Pappas. The violations the SEC identified include: Brian Pappas’ communication of material inside information to select shareholders; improper loans to or for the benefit of Company officers, including a loan to a company associated with Brian Pappas; false statements in SEC filings in 2015 related to the fiscal year ended 2014; failure to disclose related party transactions; and failure to establish and conduct company affairs with proper internal controls over financial reporting. Other elements of the settlement proposal include: each of the Company’s current audit committee members would certify that the Company has instituted various remedial measures; and the Company would retain an independent consultant (subject to the review and approval of the SEC staff) to review and verify that the foregoing remedial measures have been instituted. The Company continues to work with the SEC Staff toward finalizing the settlement.

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CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 

On March 7, 2016, FranVentures (“FV”), a company operated by Brian Pappas, filed suit in state court in St. Johns County, Florida against the Company and its affiliate BFK Franchise Company, LLC (collectively “the Company”) alleging breach of contract and seeking a declaratory judgment. On October 27, 2016, Brian Pappas filed a motion to amend the complaint 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 Company intends to vigorously litigate FranVentures’ complaint against the company.

On June 23, 2016, the Company filed a counterclaim against its FV, which also included a complaint against former Chairman of the Board and Chief Executive Officer Brian Pappas and also named Christine Pappas as a defendant. The counterclaim and complaint seeks redress for losses and expenditures caused by fraud, conversion of company assets, and breaches of fiduciary duty that the Company alleges that defendants perpetrated upon CLC.

On May 10, 2017, Blake Furlow and Anik Furlow filed with the U.S. Securities and Exchange Commission a Schedule 13D/A stating that they had delivered to the Company a written consent to remove two members of the existing board of directors (Messrs. Grant and Gorin); to amend the bylaws to permit shareholders to fix the size of the board; to fix the size of the board at five directors; and to elect 3 directors, Blake Furlow, Gary Herman, and Bart Mitchell, to fill the open Board seats. The filing further stated that Blake Furlow and Anik Furlow intend to solicit proxies from ten or fewer shareholders in connection with their written consent, and that the record date for their consent solicitation is fixed at May 10, 2017.

(8) Subsequent Events

On May 11, 2017, Creative Learning Corporation appointed Karla Kretsch President, effective immediately. Ms. Kretsch has served as the Company’s Chief Operating Officer since January 2017 and will continue with this role as well. Ms. Kretsch and her husband own a Bricks 4 Kidz Franchise in Arizona and have a partnership arrangement with a marketing vendor which pays her an de minimis payment. Ms. Kretsch Bricks 4 Kidz franchise royalty terms follow our traditional franchise model which is illustrated in 2016 10-K. In connection, with Ms. Kretsch's appointment, the company is implementing a stock ownership plan. Michelle Cote was President from July 2015 through May 2017, Ms. Cote transitioned to Creative Director with Creative Learning Corporation.

On April 24, 2017, the Company announced that it has entered into a settlement agreement to resolve the lawsuit brought against the Company by former Chief Financial Officer Richard Nickelson, as further reported in the Company’s Form 8-K filed with the SEC on that date.

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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, 2017, BFK franchisees operated in 615 territories in 44 states and 43 countries, and SF franchisees operated in 12 territories in 6 states and 2 countries.

Three Months ending March 31, 2017 Highlights

The Company experienced a period of retraction in the number of operating franchises, as of March 31, 2017 compared to December 31, 2016, from 650 operating territories to 627 operating territories within the two brands. The majority of the Franchisees who exited the system during the period were not actively running their franchises and/or had issues with the prior management team. Initial franchise fees were $87,000 lower when comparing the quarter ending March 31, 2017 to the same quarter in the previous year. The decrease was due to BFK not being able to sell franchises in the United States until September of 2016 and the lead time required of those sales. Royalty fees were up approximately $27,000 when compared to the quarter ending March 31, 2016. The increase in royalties is related to the increase in the royalty fee which went into effect in October of 2016 and contract settlements.

Operating expenses decreased by approximately $946,000 to approximately $814,000 in the quarter ended March 31, 2017 from approximately $1,760,000 in the quarter ended March 31, 2016, due to significant decreases in professional fees and legal settlements of $408,000, in advertising expenses of $235,000, and in other general and administrative expenses of $158,000. A large portion of the professional fees and legal settlements in the second quarter of 2016 were related to issues that resulted from the prior management's decisions. Costs related to these items decreased in the 2^nd quarter of 2017 but were partially offset by professional fees related to the proxy contest.t. Proxy related costs were approximately $310,000

The net loss for the quarter ended March 31, 2017 was approximately $159,000, which was an improvement of $570,000 over the same quarter in the prior year, primarily due to the decrease in operating expenses.

Six Months Ending March 31, 2017 Highlights

Initial franchise fees were $340,000 lower when comparing the six months ending March 31, 2017 to the same period in the previous year. The decrease was due to BFK not being able to sell franchises in the United States until September of 2016 and the lead time required of those sales. Royalty fees were up approximately $74,000 when compared to the quarter ending March 31, 2016. The increase in royalties is primarily related to the increase in the royalty fee which went into effect in October of 2016 and contract settlements.

Operating expenses decreased by approximately $2,003,000 to approximately $1,592,236 in the six months ended March 31, 2017 from approximately $3,595,046 in the six months ended March 31, 2016, due to significant decreases in professional fees and legal settlements of $928,000, in advertising expense of $375,000, and in other general and administrative expenses of $277,000. A large portion of the professional fees and legal settlements in the first six months of 2016 were related to issues that resulted from the prior management's decisions. Costs related to these items decreased in the first six months of 2017 but were partially offset by professional fees related to the proxy contest. Proxy related costs were approximately $310,000.

The net loss for the six months ended March 31, 2017 was approximately $179,000 which was an improvement of $1,080,000 over the same quarter in the prior year, primarily due to the decrease in operating expenses.

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Liquidity and Capital Resources

The Company’s primary source of liquidity is from cash generated through operations. From January of 2016 through August 2016, the Company was not able to sell franchises in the United States, and at the same time the Company had significant professional fees and regulatory cash outlays which put adverse pressure on the Company’s liquidity. The Company believes its US sales will rebound after resuming sales in the US and its cash outlays related to professional fees and regulatory functions will return to traditional levels for a similar business. The company will explore all options to improve liquidity.

Cash funds are used for ongoing operating expenses, the purchase of equipment, property improvement, and software development. During the six months ending March 31, 2017 and 2016, the Company purchased property and equipment totaling approximately $1,000 and $70,000 respectively.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable to us as a smaller reporting company.

Item 4. Controls and Procedures.

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our management, including our interim Chief Executive Officer and our Chief Financial Officer (who serves as our principal financial officer and principal accounting 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 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 including our President and Chief Financial Officer, 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.

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. There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2017 that materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

 

Item 1. Legal Proceedings

Please see Note 7 Commitments and Contingencies, to the financial statements contained elsewhere in this Quarterly Report on Form 10-Q.

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 CLC's most recent annual report on Form 10-K.

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

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits

Exhibit No.			Exhibit
10.1			Employment Agreement, dated as of January 25, 2017, between the Company and Karla Kretsch.(1)
31.1			Certification of Interim Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1			Certification of Interim Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

———————

(1)

Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on January 31, 2017.

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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.

 

	CREATIVE LEARNING CORPORATION
Dated: May 12, 2017	By:	/s/ Karla Kretsch
		Karla Kretsch,
		President and COO (Principal Executive Officer)
Dated: May 12, 2017	By:	/s/ Christian Miller
		Christian Miller,
		Chief Financial Officer (Principal Accounting Officer)

 

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EXHIBIT INDEX

Exhibit No.			Exhibit
10.1			Employment Agreement, dated as of January 25, 2017, between the Company and Karla Kretsch.(1)
31.1			Certification of Interim Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1			Certification of Interim Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

———————

(1)

Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on January 31, 2017.

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