Quarterly Report

10-Q 1 clcn_10q.htm QUARTERLY REPORT Quarterly Report

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, 2016

¨ 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)


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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ

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 December 12, 2016.

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	17
Item 3	Quantitative and Qualitative Disclosure About Market Risk	18
Item 4	Controls and Procedures	18

	PART II

Item 1	Legal Proceedings	19
Item 1A	Risk Factors	21
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3	Defaults Upon Senior Securities	22
Item 4	Mine Safety Disclosures	22
Item 5	Other Information	22
Item 6	Exhibits	22

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.

PART I

Item 1. Financial Statements

CREATIVE LEARNING CORPORATION

Consolidated Balance Sheets


	March 31,			September 30,
	2016			2015
	(Unaudited)
Assets
Current Assets:
Cash	$	981,921		$	2,450,609
Restricted cash (marketing fund)		156,983			248,777
Accounts receivable, less allowance for doubtful accounts of approximately $166,000 and $165,000, respectively		214,859			407,270
Prepaid expenses		35,000			11,278
Notes receivable - current portion, less allowance for doubtful accounts of approximately $39,000 and $26,000, respectively		51,630			97,794
Income tax receivable		1,005,573			254,527
Assets of discontinued operations		—			57,199
Total Current Assets		2,445,966			3,527,454

Notes receivable - net of current portion		66,150			86,670
Property and equipment, net of accumulated depreciation of approximately $157,000 and $134,000, respectively		330,348			283,955
Intangible assets		100,504			100,504
Deposits		6,425			11,425
Deferred tax assets		75,584			81,583
Total Assets	$	3,024,977		$	4,091,591

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable - related party	$	1,027		$	240
Accounts payable - other		457,827			119,113
Payroll accruals		13,540			36,490
Accrued liabilities		400,041			428,058
Unearned revenue		115,900			35,900
Accrued marketing fund		108,176			248,777
Customer deposits		10,000			19,982
Liabilities of discontinued operations		—			9,016
Total Current Liabilities		1,106,511			897,576
Commitments and Contingencies - Note 8
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 issued and outstanding		1,200			1,200
Additional paid-in capital		2,534,554			2,534,554
Treasury Stock 65,100 shares and 15,100 shares, respectively (cost method)		(34,626	)		(18,126	)
Retained earnings		(582,662	)		676,387
Total Stockholders’ Equity		1,918,466			3,194,015

Total Liabilities and Stockholders’ Equity	$	3,024,977		$	4,091,591

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

CREATIVE LEARNING CORPORATION

Consolidated Statements of Operations

(Unaudited)


	For The Three Months Ended						For The Six Months Ended
	March 31,						March 31,
	2016			2015			2016			2015
				(restated)						(restated)
Revenues:
Initial franchise fees	$	97,700		$	748,977		$	480,400		$	1,319,143
Royalties fees		544,282			696,643			1,106,503			1,264,897
Merchandise sales		160			1,000			213			1,283
		642,142			1,446,620			1,587,116			2,585,323
Operating expenses:
Franchise consulting and commissions:
Related parties		—			119,555			—			239,130
Other		58,481			125,054			211,171			337,335
Franchise training and expenses		70,824			90,828			150,411			178,698
Salaries and payroll taxes		268,035			290,405			597,109			582,651
Advertising		244,913			212,164			397,240			433,155
Professional fees		824,728			130,624			1,667,206			227,992
Office expense		7,658			31,970			26,170			63,054
Bad debt expense		32,954			39,000			48,810			48,000
Depreciation		13,161			10,194			22,683			20,375
Other general and administrative expenses		195,416			200,012			354,529			374,599
Total operating expenses		1,716,170			1,249,806			3,475,329			2,504,989
(Loss) income from operations		(1,074,028	)		196,814			(1,888,213	)		80,334

Other income (expense):
Interest income - net		1,120			2,234			2,858			3,634
Legal settlement		(44,717	)		—			(119,717	)		—
Other income (expense)		(18,175	)		(737	)		19,131			(2,747	)
Total other income (expense)		(61,772	)		1,497			(97,728	)		887
(Loss) income before benefit from income taxes		(1,135,800	)		198,311			(1,985,941	)		81,221

Benefit from (provision) for income taxes		407,433			(64,354	)		734,593			(26,357	)
Net (loss) income from continuing operations		(728,367	)		133,957			(1,251,348	)		54,864
Discontinued operations:
Operating (loss) income from discontinued operations		(335	)		16,707			(12,221	)		(1,837	)
Income tax benefit (provision)		(54	)		(5,422	)		4,520			596
(Loss) income from discontinued operations		(389	)		11,285			(7,701	)		(1,241	)
Net (loss) income	$	(728,756	)	$	145,242		$	(1,259,049	)	$	53,623
Net (loss) income per share
Basic and diluted
Continuing operations	$	(0.06	)	$	0.01		$	(0.10	)	$	0.00
Discontinued operations	$	(0.00	)	$	0.00		$	(0.00	)	$	(0.00	)
Total	$	(0.06	)	$	0.01		$	(0.10	)	$	0.00

Basic and diluted weighted average number of common shares outstanding		12,001,409			11,935,231			12,001,409			11,908,552

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

CREATIVE LEARNING CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)


	For the Six Months Ended
	March 31,
	2016			2015
				(restated)
Cash flows from operating activities:
Net (loss) income	$	(1,259,049	)	$	53,623
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Loss from discontinued operations		7,701			1,241
Depreciation		22,683			20,375
Bad debt expense		48,810			48,000
Deferred income taxes		5,999			—
Stock issued for services		—			5,040
Changes in operating assets and liabilities:
Restricted cash		91,794			(43,306	)
Accounts receivable		122,449			(112,684	)
Prepaid expenses		(23,722	)		(24,522	)
Notes receivable		34,970			(20,972	)
Deposits		5,000			724
Accounts payable - related parties		787			(42,211	)
Accounts payable - 3rd parties		338,714			(146,768	)
Payment of legal settlement		—			—
Accrued liabilities		(28,017	)		(19,920	)
Unearned revenue		80,000			25,900
Payroll accruals		(22,950	)		(30,073	)
Accrued marketing		(87,735	)		43,306
Customer deposits		(9,982	)		(29,272	)
Income tax receivable		(746,526	)		72,343
Net cash used in operating activities		(1,419,074	)		(199,176	)
Net cash provided by (used in) discontinued operations		19,462			(57,362	)
Cash flows from investing activities:
Acquisition of property and equipment		(69,076	)		(32,161	)
Funding of loan to related party		—			(2,100	)
Net cash used in investing activities		(69,076	)		(34,261	)
Net change in cash		(1,468,688	)		(290,799	)
Cash, beginning of period		2,450,609			3,050,983
Cash, end of period	$	981,921		$	2,760,184

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			—
Issuance of 85,000 shares on February 18, 2015 for Sew Fun Mediation		—			106,250

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

CREATIVE LEARNING CORPORATION

Consolidated Statement of Stockholder's Equity

(Unaudited)


											Additional
	Treasury Stock						Common Stock				Paid-in		Retained
	Shares			Value			Shares		Par Value		Capital		Earnings			Total

Balance, October 1, 2015		(15,100	)	$	(18,126	)		12,001,409	$	1,200	$	2,534,554	$	676,387		$	3,194,015

Treasury stock (cost)		(50,000	)		(16,500	)											(16,500	)
Net loss for the six months ended March 31, 2016														(1,259,049	)		(1,259,049	)
Balance, March 31, 2016		(65,100	)	$	(34,626	)		12,001,409	$	1,200	$	2,534,554	$	(582,662	)	$	1,918,466

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

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 wholly owned subsidiaries, BFK Franchise Co., LLC (BFK), CI Franchise Co., LLC (CI), and SF Franchise Company, LLC (SF) under the trade names Bricks 4 Kidz®, Challenge Island®, and Sew Fun Studios™ respectively, that offer children's enrichment and education franchises. As of March 31, 2016, BFK franchisees operated in 691 territories in 45 states and 38 countries, and SF franchisees operated in 12 territories in 10 states and 3 countries. The Company previously operated Challenge Island Franchise Co., LLC (CI) in 49 territories in 44 states and 3 countries.

The Company sold the 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, 2016 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, 2015. In addition, refer to Note 6 regarding the sale of Challenge Island and related discontinued operations classification.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

Restatement

The previously issued consolidated financial statements of the Company as of and for the six months ended March 31, 2015 have been restated. It was management’s determination that the Company had not properly presented cash, restricted cash, prepaids, other receivables, income tax receivable, deferred tax assets, accounts payable, accrued stock payable, accrued marketing fund, deferred tax liability, legal settlement, accrued liabilities, franchise consulting & commissions, salaries and payroll taxes, professional fees, other general and administrative expenses, and provision for income taxes.

Restatement of 2015 Financial Statements


	As reported 3/31/2015			CI Adjustment			Post CI Adjustment Balance			Restatement			Restated Balance 3/31/2015
Assets
Cash	$	2,739,673		$	(35,155	)	$	2,704,518		$	6,311		$	2,710,829
Restricted cash		225,984			—			225,984			(5,824	)		220,160
Prepaids		35,622						35,622			(7,750	)		27,872
Other receivables - current portion		191,935			(130,943	)		60,992			(1,075	)		59,917
Other receivables - net of current portion		55,183			—			55,183			(17,273	)		37,910
Income tax receivable		41,825			—			41,825			38,351			80,176
Deferred tax asset		48,723			—			48,723			(44,776	)		3,947
Total assets	$	4,288,586		$	—		$	4,288,586		$	(32,461	)	$	4,256,125

Liabilities
Accounts payable - related parties	$	18,006		$	—		$	18,006		$	(17,983	)	$	23
Accounts payable		194,160			(18,735	)		175,425			17,984			193,409
Accrued stock payable		10,080			—			10,080			(10,080	)		—
Accrued marketing fund		225,984			(5,874	)		220,110			50			220,160
Deferred tax liability		5,550			—			5,550			(5,550	)		—
Legal settlement		25,000			—			25,000			(25,000	)		—
Accrued liabilities		—			—			—			35,080			35,080
Long-term deferred tax liability		22,230			—			22,230			(22,230	)		—
Total liabilities	$	594,800		$	—		$	594,800		$	(28,154	)	$	566,646

Stockholders’ Equity
Common stock	$	1,198		$	—		$	1,198		$	—		$	1,198
Additional paid-in capital		2,518,176			—			2,518,176			—			2,518,176
Treasury stock		(16,845	)		—			(16,845	)		—			(16,845	)
Retained earnings		1,191,257			—			1,191,257			(4,307	)		1,186,950
Total stockholders' equity	$	3,693,786		$	—		$	3,693,786		$	(4,307	)	$	3,689,479


	As reported Six Months Ended 3/31/2015		CI Adjustment			Post CI Adjustment Balance		Restatement			Restated Balance Six Months Ended 3/31/2015
Expenses
Franchise consulting & commissions- related parties		252,898					252,898		(13,768	)		239,130
Franchise consulting & commissions-other		445,466		(121,898	)		323,568		13,767			337,335
Salaries and payroll taxes		612,724		—			612,724		(30,073	)		582,651
Professional fees		228,291		(263	)		228,028		(36	)		227,992
Other general and administrative expenses		253,678		(20,167	)		233,511		141,088			374,599
Provision for income taxes		74,000		—			74,000		(48,239	)		25,761
Net income	$	116,361	$	—		$	116,361	$	(62,738	)	$	53,623

Total earnings per share - basic & diluted	$	0.01				$	0.01				$	0.00

CREATIVE LEARNING CORPORATION

Notes to Financial Statements


	As reported Three Months Ended 3/31/2015			CI Adjustment			Post CI Adjustment Balance			Restatement			Restated Balance Three Months Ended 3/31/2015
Revenue
Initial franchise fees	$	872,737		$	(147,750	)	$	724,987		$	23,990		$	748,977
Royalty Fees		740,811			(20,178	)		720,633			(23,990	)		696,643

Expenses
Franchise consulting & commissions- related parties		122,655			—			122,655			(3,100	)		119,555
Franchise consulting & commissions-other		188,732			(66,777	)		121,955			3,099			125,054
Salaries and payroll taxes		293,886			—			293,886			(3,481	)		290,405
Advertising		250,067			(46,153	)		203,914			8,250			212,164
Professional fees		131,352			—			131,352			(728	)		130,624
Other general and administrative expenses		207,371			(12,652	)		194,719			5,293			200,012
Interest income (expense)		3,870			(236	)		3,634			(1,400	)		2,234
Other income (expense)		(2,747	)		—			(2,747	)		2,010			(737	)
Provision for income taxes		85,500			—			85,500			(15,724	)		69,776
Net income	$	138,239		$	—		$	138,239		$	7,003		$	145,242

Total earnings per share - basic & diluted	$	0.01					$	0.01					$	0.01

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, 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 had restricted cash of approximately $157,000 and $249,000, at March 31, 2016 and September 30, 2015, respectively, associated with a marketing fund collected from the franchisees. Per the franchise agreements, a marketing fund of 2% of franchisee’s gross cash receipts is collected and held to be spent on the promotion of the brand (see Note 4).

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

Accounts and Notes Receivable

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, 2016 and September 30, 2015 is adequate, but actual write-offs could exceed the recorded allowance. During the six months ended March 31, 2016, the values of accounts written-off to the reserve were approximately $70,000 and during the year ended September 30, 2015 the amount of these write-offs was $156,000.

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.

At March 31, 2016 and September 30, 2015 the Company had approximately $116,000 and $36,000, respectively, in unearned revenue for franchise fees collected but not yet earned per the revenue recognition policy.

Advertising Costs

Advertising costs are expensed as incurred. The Company incurred advertising costs for the quarters ended March 31, 2016 and 2015 of approximately $245,000 and $212,000, 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.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

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. 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, 2016 and September 30, 2015, respectively, and has not recognized interest and/or penalties during the quarters ended March 31, 2016 and 2015, respectively, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within in the next twelve months.

The tax years subject to examination by major tax jurisdictions include the years 2011 and forward by the U.S. Internal Revenue Service, and the years 2010 and forward for various states.

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 ASU including ASU 2016-12, 2016-11, 2016-10 and 2016-8. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 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 first quarter of 2017. 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 Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.

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. We are currently assessing the impact that the adoption of ASU 2016-09 will have on our financial statements.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance becomes effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company adopted this guidance retrospectively as of October 1, 2015 and reclassified $75,584 and $81,583 from deferred costs to long-term deferred tax liability in March of 2016 and September of 2015, respectively.

Recent Events

On December 9, 2016, Brian Pappas, through his controlled company FranVentures, LLC, filed with the U.S. Securities and Exchange Commission 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. As a result, shareholders may have received, or may receive in the future, consent solicitation materials from FranVentures and/or Mr. Pappas seeking their written consent to remove the current Board members and elect the three individuals proposed by Mr. Pappas.

On December 16, 2016, we announced that our Board of Directors had determined that the consent solicitation commenced by Mr. Pappas and FranVentures is not in the best interests of all of the Company’s stockholders. The Company intends to file with the SEC a preliminary consent revocation statement in connection with the consent solicitation being conducted by Mr. Pappas and FranVentures, which will explain in more detail the Board’s reasons for opposing Mr. Pappas’ attempt to gain control of the Company.

(2) Related Party

During the six months ended March 31, 2016 and 2015, the Company paid related parties (companies related by common control) for the following expenses:


	Commissions and Consulting
	Six months ended
	March 31,
Related Party	2016		2015
FranVentures, LLC (1)	$	—	$	66,413
MC Logic, LLC (2)	$	—	$	21,000
Leap Ahead Learning Company (3)	$	—	$	33,000
Bottom Line Group (4)	$	—	$	65,117
Jeffry Ball and J. Ball Group LLC (5)	$	—	$	45,380
	$	—	$	230,910

(1)

Brian Pappas is a director and former chief executive officer of the Company. Effective July 22, 2015, Mr. Pappas was no longer employed by the Company. Mr. Pappas is the Managing Director and a minority owner of FranVentures, LLC. FranVentures, LLC received a 5% commission on BFK franchise sales by the Company prior to April 8, 2015. The related party payable was $-0- at March 31, 2016 and September 30, 2015. Not included above are travel and expense charges for Mr. Pappas for the six months ending March 31, 2016 and 2015, respectively of approximately $-0- and $70. The wife of Mr. Pappas, Chris Pappas, was the human resources and payroll manager for the Company with compensation for the six months ending March 31, 2016 and 2015, respectively of approximately $-0- and $12,500. Effective August 6, 2015, Mrs. Pappas was no longer employed by the Company and did not receive compensation subsequent to her leaving employment with the Company. Not included above are expense reimbursements for Mrs. Pappas for the six months ending March 31, 2016 and 2015 of approximately $-0- and $2,000, respectively.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements


(2)	MC Logic, LLC (“MC Logic”) is 100% owned by Michelle Cote, who is the Company’s President and Secretary and a former director and founder of the Company. Not included above are travel and expense reimbursements paid of approximately $-0- and $4300, respectively for the six months ending March 31, 2016 and 2015. The related party payable was $-0- at March 31, 2016 and 2015. During the quarter ended December 31, 2013, the Company made a non-interest bearing loan in the amount of $125,000 to MC Logic. Later in that same quarter, management determined that the loan could be deemed a violation of Section 13(k) of the Exchange Act and Section 402 of the Sarbanes-Oxley Act and immediately sought repayment in full of the loan. MC Logic promptly repaid the entire amount of the loan before the end of the fiscal quarter ended December 31, 2013. 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 $10,217.73 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, and MC Logic is current on those payments as of September of 2016.
(3)	Leap Ahead Learning Company is 100% owned by Dan O’Donnell, who was a director and the Chief Operating Officer of the Company until his resignation on April 6 2016. Until April 15, 2015, the Company had paid Leap Ahead Learning $5,000 per month for consulting services except in November of 2014 when Leap Ahead Learning was paid $8,000. These services were provided through Mr. O'Donnell. Not included above are travel and expense reimbursements paid of approximately $4,000 and $23,000, respectively for the six month periods ended March 31, 2016 and 2015. The related party payable was approximately $1,000 and $-0-, respectively at March 31, 2016 and 2015.
(4)	Bottom Line Group is owned by Jeff Pappas, a brother to Brian Pappas. The Business Consulting and Development Agreement between Bottom Line Group and the Company was terminated on September 25, 2015. Bottom Line Group served as one of the Company’s brokers in the sale of franchises. Payments to Bottom Line Group include commissions and consulting fees reflected in the table above. Not included above are travel and expense reimbursements paid of approximately $-0- and $5,000, respectively for the six months ended March 31, 2016 and 2015. The related party payable was approximately $-0- and $-0-, respectively at March 31, 2016 and 2015. Not included in the related party schedule above are payments made to Michael Pappas (son to Jeff Pappas). The Business Consulting and Development Agreement between Michael Pappas and the Company has been terminated effective September 26, 2015. Payments made to Michael Pappas in the six months ended March 31, 2016 and 2015 were approximately $-0- and $8,000, respectively.
(5)	J. Ball Group LLC is owned by Jeffery Ball, a son-in-law to Brian Pappas. The Independent Contractor Agreement between Jeffrey Ball and J Ball Group, LLC and the Company was terminated on September 30, 2015. The J Ball Group LLC served as one of the Company’s brokers in the sale of franchises. Payments reflected in the table above include commissions and consulting fees. Not included above are travel and expense reimbursements paid of approximately $-0- and $3,000, respectively for the six months ended March 31, 2016 and 2015. There was no related party payable at March 31, 2016 or 2015. In January 2015, Jeffery Ball formed J. Ball Group LLC, which in these financial statements and disclosures have been presented as one business activity with amounts paid to either entity combined.

The Company had $11,130 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.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

(3) Notes and Other Receivables

At March 31, 2016 and September 30, 2015 respectively, the Company held certain other receivables totaling approximately $157,000 and $210,000 respectively for extended payment terms of franchise fees, generally non-interest bearing notes with monthly payments, payable within one to two years. The Company only writes off franchisees’ receivables in the event that they leave the network. In addition, the Company analyzes collectability of all receivables and reserves accordingly.


	2016		2017		2018		2019		Thereafter		Total
Payment schedules for Notes Receivable	$	74,387	$	33,978	$	14,000	$	12,950	$	21,725	$	157,040

(4) Accrued Marketing Fund

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 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, 2016 and September 30, 2015, the accrued marketing fund liability balances were approximately $108,000 and $249,000, respectively.

(5) Accrued Liabilities

The Company had accrued liabilities at March 31, 2016, and September 30, 2015 as follows:


	March 31,			September 30,
Accrued Liabilities	2016			2015
Accrued Audit Fees	$	10,000		$	8,581
Accrued Legal Fees		105,508			213,130
Accrued Legal Settlements		17,000			101,897
Accrued State Regulatory Settlement		206,800			104,450
Accrued Advertising		21,826			—
Accrued Consulting & Commissions		29,911			—
Accrued Franchisee Expense		9,991			—
Accrued Travel		2,226			—
Accrued Office expense		964
Insurance overpayment		(4,185	)
	$	400,041		$	428,058

The Company accrued $206,800 for state penalties and costs and the reimbursement of six franchisees as of March 31, 2016.

(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.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

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.

For the fiscal year ended September 30, 2015, loss on assets held for sale of approximately $28,000 was recorded, representing the difference between the carrying value and fair value of the sold assets and liabilities. In addition, other CI assets, not included in the sale, were determined to be of no continuing value and were written-off at September 30, 2015.

The following table lists the assets held for sale and liabilities held for sale of CI at September 30, 2015 and the operating loss on the assets held for sale.


	As of
CI Franchise Company LLC	09/30/15
Assets of discontinued operations
Cash	$	24,032
Accounts receivable		16,667
Notes receivable		16,500
Total Assets of discontinued operations	$	57,199

Liabilities of discontinued operations
Accounts payable		9,016
Total Liabilities of discontinued operations	$	9,016


	Three months ended						Six months ended
Operating Loss on discontinued operations	3/31/2016			3/31/2015			3/31/2016			3/31/2015
Revenue	$	(45	)	$	168,067		$	(6,016	)	$	252,941
Advertising and promotion		—			(46,153	)		(7,635	)		(62,287	)
Bad debt		—			(18,118	)		—			(24,118	)
Commissions and consulting		—			(66,776	)		—			(121,898	)
Franchisee expense		—			(4,578	)		—			(19,925	)
Professional fees		—			—			—			(263	)
Office expense		—			(2,297	)		—			(4,451	)
Depreciation expense		—			(883	)		—			(1,767	)
General and administrative expenses		(289	)		(12,555	)		1,430			(20,069	)
Operating (loss) income on discontinued operations	$	(335	)	$	16,707		$	(12,221	)	$	(1,837	)

(7) Common Stock

In connection with the Discontinued Operations (see Note 6), in December 2015, the Company recorded Treasury Stock in the amount of $16,500 using the Cost Method for the 50,000 shares repurchased.

(8) 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.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

Rent expense was approximately $18,000 and $17,000, respectively, for the six months ended March 31, 2016 and 2015.

Included in the rent expense for the six months ended March 31, 2016, was $11,130 for a facility under lease by a related party (see Note 2).

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.

The Company was involved in arbitration with Sew Fun, LLC (SFLLC), from which the Company previously purchased intellectual property to establish a new sewing franchise concept. In 2015 the Company and SFLLC entered into a settlement agreement which provided for a payment of $106,000 in stock (which was granted in 2014) and $85,000 in cash (which was accrued in 2015 and paid subsequent to year end) as well as agreements on trademarks and license usage. The prior owner of SFLLC has a suit outstanding with a claim for an additional $42,000, which the Company is contesting. The Court denied the Company’s Motion to Dismiss and both sides have filed for summary judgment, each of which the Court has denied. No amount has been accrued for this additional claim.

In February 2015, the Company was sued for defamation 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 pertinent 8-K filing occurred prior to the ascension to the Board any of the company’s current directors. The former officer alleged that the claimed misstatement in the SEC filing was false, was maliciously designed to injure the plaintiff in retribution for his having reported problems and pressed for changes at the company, and injured the reputation of the individual. The former officer seeks lost wages and income, compensatory damages, other damages and requests that a replacement Form 8-K be filed. The case is in the discovery phase. The company is in settlement negotiations with the plaintiff.

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 Franchise Ventures. The lawsuit seeks 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 have returned certain company documents that they have identified, but other issues remain.

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.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

On March 7, 2016, Franchise Ventures (“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. The complaint does not state an amount of damages. FV claims that the Company has an ongoing contractual obligation to pay FV compensation in the form of commissions and other payments per the original LLC operating agreement under which BFK LLC was formed (“BFK Operating Agreement”). FV acknowledges that the Company terminated the LLC operating agreement and stopped paying FV in October 2015. FV’s complaint seeks recovery of compensation allegedly due after the termination date. Although the complaint is unclear, it appears to allege that the Company has no right ever to terminate the operating agreement. The Company contends that neither FV nor Mr. Pappas had any continuing right to franchise sales commissions under the BKF LLC operating agreement after FV ceased serving as managing member of BFK LLC when the Company acquired it. The Company further contends that: (a) the terms of the BFK Operating Agreement clearly provide that FV was owed compensation strictly for providing BFK LLC services as its managing member; (b) FV’s term as managing member of BFK LLC ended when CLC acquired it and CLC supplanted FV as the sole managing member of BFK LLC; and (c) in any event, under the terms of the BFK Operative Agreement, CLC had the full right to terminate the BKF LLC operating agreement on October 1, 2015, thereby eviscerating any conceivable legal rights FV might assert under that agreement thereafter. The Company contends that neither FV nor Mr. Pappas had any continuing right to franchise sales commissions under the BKF LLC operating agreement after FV ceased serving as managing member of BFK LLC when the Company acquired it on July 2, 2010. On October 27, 2016, plaintiff FranVentures filed a motion seeking leave to amend its complaint to add a claim alleging that the Company had entered into an oral contract or one implied by the parties’ conduct. The amended complaint does not address the Company’s position that even if a contract had been in place it had been terminated. The Court denied the Company’s motion to dismiss FV’s complaint, and discovery continues. 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 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 Pappas serving as the Chief Executive Officer of CLC and a member of its board of directors. The counterclaim and/or complaint alleges the following:

First, Pappas defrauded CLC, converted company assets and breached his fiduciary duty of loyalty by causing CLC to pay his company, FranVentures, more than $1,000,000 by falsely asserting that the funds were due under a contractual provision that Pappas knew had expired when CLC acquired BFK Franchise Company, LLC (“BFK”). After CLC stopped payments to FV in October 2015, Pappas sued CLC, claiming that CLC had to pay FV under that contract in perpetuity – that is, Pappas took the position that CLC never could stop paying his company – even though he knew that there was no legal basis for his claims.

Second, to conceal the foregoing fraud scheme, Pappas made and caused to be made material false statements and material omissions regarding the transaction to CLC independent directors as well as in CLC’s filings with the U.S. Securities and Exchange Commission (the “SEC”).

Third, Pappas breached his fiduciary duty of loyalty to CLC by repeatedly engaging in self-dealing and causing CLC to enter into several transactions with, and to make payments to or on behalf of, several members of his family, including his wife and brother, which transactions and payments were not disclosed to or approved by CLC’s board of directors and were not in the best interests of the Company and its shareholders.

In particular, Pappas breached his fiduciary duty of loyalty by causing CLC to engage in repeated financial transactions with brother, Jeff Pappas including: (i) causing CLC to pay Jeff Pappas and/or his company approximately $560,000 in commissions and retainer payments from in or about 2010 to in or about 2015 including for handling CLC franchise sales, knowing or having reason to know that Jeff Pappas would and did do so in a reckless manner that exposed CLC to regulatory risk, liability, financial loss and reputational damage; and (ii) causing CLC to provide various financial benefits to Jeff Pappas to the financial detriment of CLC, including causing CLC to make loans and extensions of credit to Jeff Pappas and his company totaling approximately $40,000 in or about 2011-12 and thereafter causing CLC to write-off these loans and credit extensions as bad debt prior to their due date, notwithstanding that Pappas was during the same time causing CLC to pay retainer and commission payments to Jeff Pappas and his companies of at least $89,000. Pappas intentionally paid his brother these sums instead of setting off Jeff Pappas’ debt against the commissions and retainers purportedly owed to him.

CREATIVE LEARNING CORPORATION

Notes to Financial Statements

ii.

Pappas also breached his fiduciary duty of loyalty by causing CLC to pay at least $95,000 in charges incurred by Pappas and his wife, Christine Pappas, on a CLC American Express credit card from in or about 2013 to in or about July 2015 without maintaining at the time, and thereafter in 2016 refusing to provide, proper and adequate business records and documentation for those expenditures. As a result, CLC is unable to verify that these expenditures were incurred for a proper business purpose and cannot deduct these payments as business expenses.

Fourth, Pappas breached his fiduciary duty of loyalty to CLC by causing CLC to expend hundreds of thousands of dollars to respond to an investigation of Pappas and the Company the SEC initiated in early 2015 while Pappas was CLC’s CEO and Chairman of the Board as a result of Pappas’ misconduct detailed above, including CLC’s transactions with and payments to FV and Pappas’ family members, public disclosures relating to these transactions that Pappas caused the Company to make, inadequate internal corporate and financial controls, and other issues.

Fifth, Pappas breached his fiduciary duty of loyalty to CLC by causing CLC liability for restitution and rescission payments, as well as state penalties and costs, in connection with an investigation conducted by the State of Virginia, alleging that Pappas committed fraud in relation to sales of Challenge Island franchises in Virginia, and that he thereafter caused an attempt to cover-up this fraud by taking further illegal actions. CLC has since divested itself of Challenge Island.

Sixth, Pappas breached his fiduciary duty of loyalty to CLC by failing to implement adequate internal financial and corporate controls, thereby concealing his other misconduct and permitting Pappas to control and dominate CLC, misappropriate the Company’s assets, and repeatedly engage in fraud and self-dealing to the detriment of the Company and its shareholders.

Seventh, Pappas’ misconduct described above was a material cause of the substantial delay and difficulty of the Company’s independent auditors in performing the audit of the Company’s financial statements for the 2015 fiscal year, which required the Company to suspend its domestic franchise sales on February 1, 2016 continuing until the date of this Complaint, causing financial loss to the Company.

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 this matter as well.

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 arbitration demand’s allegations include that misstatements and misrepresentations were made at or about the time of the purchase of the franchises. The complaint also assails other items such as the above-referenced SEC investigation, the Company’s settlements with the State of Virginia, Virginia’s “investigation and …settlement with Brian Pappas as a result of his conduct and actions during the time he served as Managing Director of BFK Franchise Co, and CEO of CLCN,” and self-dealing by corporate officers including commissions paid to officers upon sale of each new franchise.

(9) Subsequent Events

As of January 29, 2016, Creative Learning Corporation (“the Company”) temporarily suspended domestic franchise offer 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 FY2015 consolidated audited financial statements.. In turn, this has delayed completion of the Company’s 2016 Franchise Disclosure Documents (“FDDs”) for the Bricks 4 Kidz® and Sew Fun Studios®. The company has reinstated sales of Bricks 4 Kidz franchises in September of 2016 in most states.

In March 2016, the Company received a letter from the Commonwealth of Virginia State Corporation Commission alleging that Company affiliate BFK Franchise Company, LLC (“BFK”) and former Company CEO Brian Pappas had violated certain provisions of the Virginia Retail Franchising Act. The Letter sought a negotiated resolution of the issues. The Company has cooperated and negotiated a payment of approximately $60,000 in restitution and $35,000 in fines and costs. Such amounts have been accrued as legal settlement payable on the accompanying balance sheets.

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. At March 31, 2015, the Company had 706 Bricks 4 Kidz®, Challenge Island® (which was sold during 2015) and Sew Fun Studios® franchises, 25 Bricks 4 Kidz® master franchises, and 20 Bricks 4 Kidz® sub-franchises operating in 38 countries.

2^nd Quarter 2016 Highlights

During the 2^nd quarter of our 2016 fiscal year, the Company added 5 new territories and had 2 new owners due to transfer of territories making our total operating franchise territories 703 as of March 31, 2016 over the two brands. Initial franchise fees were down $651,000 for the three months ended March 31, 2016, when compared to the three months ended March 31, 2015. Total revenue has decreased $804,000 for the same period. The decrease in revenue was mainly due to the Company’s temporary suspension of domestic franchise offer and sales of franchises discussed below, although international sales did continue. The new management team has reevaluated and improving the franchise sales policy, procedure, and process. A consistent and compliant franchise agreement and franchise disclosure document was developed, implemented and is being registered with state agencies. An additional change was the termination of all past related-party sales brokers, as part of new management’s increased focus upon enhancing shareholder value and its new anti-nepotism policy. A new sales broker program has been developed that both, trains and commits any person representing the Company to consistent and ethical standards.

Operating Expenses increased to $1,716,000 for the three months ending March 31, 2016 from $1,250,000 for the three months ending March 31, 2015, or $466,000 (37%) due to significant increases in professional fees of $694,000, offset by a reduction in commissions of $186,000. A large portion of the increase in professional fees is related to issues that resulted from the prior management decisions. The net loss increased to $729,000 for the three months ending March 31, 2016 from a net income of $145,000 for the three months ending March 31, 2015, a difference of $874,000, primarily due to the increased operating expenses.

On December 9, 2015, the Company completed the sale of the Challenge Island business to its prior owner, pursuant to an asset sale and purchase agreement entered into on that date. See Note 6 to the Consolidated Financial Statements.

As of January 29, 2016, the Company temporarily suspended domestic franchise offer 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 FY2015 consolidated audited financial statements. In turn, this delayed completion of the Company’s 2016 FDDs for the Bricks 4 Kidz® and Sew Fun Studios® franchise offerings. The Company expects that offer and sales efforts will resume in approximately 70% of the states in which Bricks 4 Kidz® and Sew Fun Studios® currently sell franchises, immediately upon completion of the FDD, and in the rest of the states upon either filing or approval of the renewal applications, based upon the applicable rules of each such state. In a number of these states, the Company did not have active franchise offer and sales efforts even before the temporary suspension. This temporary suspension of domestic franchise offer and sales does not affect the Company’s international franchise offer and sales activity or its royalty fee collections from existing franchisees. The Company reinstated sales of Bricks 4 Kidz franchises in September 2016 in most states.

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 and reassess its position in December, 2016.

Cash funds are used for ongoing operating expenses, the purchase of equipment, property improvement, and software development. During the six months ending March 31, 2016, the Company purchased property and equipment totaling approximately $30,000. The Company used cash during the fiscal year ended September 30, 2015 to make payments of $55,000 on a legal settlement reached in 2014.

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 regarding the six months ended March 31, 2016, under the supervision and with the participation of our management, including our Chief Financial Officer who is also serving 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 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 including our 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. As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Our 2015 Annual Report on Form 10-K contains information regarding material weaknesses in our internal control over financial reporting as of September, 2015 as a result of material weaknesses primarily related to a lack of sufficient personnel with appropriate training and expertise in accounting principles generally accepted in the United States, the lack of senior management leadership in the area, and the absence of board independence and the ability of the Audit Committee to function fully effectively until late July 2015.

During the first six months of 2016, the Company did not successfully address the material weaknesses mentioned above with the exception of the changes to the Board of Directors.

PART II

Item 1. Legal Proceedings

ii.

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

The Company executed a purchase and sale agreement with the prior owner of the Challenge Island business 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 consisted of the transfer to the Company certain shares of the Company’s common stock that had been held by the purchaser, as well as the assumption of certain liabilities related to the acquired assets. The transaction was structured as a sale of assets, with CLC being the seller and Challenge Island Global being the purchaser. As a result of the sale, the Company’s obligation to issue these additional 25,000 shares was terminated.

In connection with the Discontinued Operations (see Note 6), in December 2015, the Company recorded 50,000 shares of Treasury Stock in the amount of $16,500 using the Cost Method.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits


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

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: December 22, 2016	By:	/s/ Rod Whiton
		Rod Whiton,
		Interim Chief Executive Officer (Principal Executive Officer)

Dated: December 22, 2016	By:	/s/ Christian Miller
		Christian Miller,
		Chief Financial Officer (Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.			Exhibit
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