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 December 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 February 1, 2017.

 

 





 


CREATIVE LEARNING CORPORTION

Form 10-Q

Quarter Ended December 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

13

Item 3

Quantitative and Qualitative Disclosure About Market Risk

13

Item 4

Controls and Procedures

14

 

 

 

 

PART II

 

 

 

 

Item 1

Legal Proceedings

15

Item 1A

Risk Factors

17

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

17

Item 3

Defaults Upon Senior Securities

18

Item 4

Mine Safety Disclosures

18

Item 5

Other Information

18

Item 6

Exhibits

18






 


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;

 

·

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


 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$

76,421

 

 

$

276,685

 

Restricted cash (marketing fund)

 

 

160,933

 

 

 

162,447

 

Accounts receivable, less allowance for doubtful accounts of approximately $238,000 and $218,000, respectively

 

 

236,859

 

 

 

240,640

 

Prepaid expenses

 

 

168,575

 

 

 

120,000

 

Notes receivable - current portion, less allowance for doubtful accounts of approximately $31,000 and $26,000, respectively

 

 

50,151

 

 

 

16,595

 

Income tax receivable

 

 

417,600

 

 

 

424,938

 

Total Current Assets

 

 

1,110,539

 

 

 

1,241,305

 

 

 

 

 

 

 

 

 

 

Notes receivable - net of current portion

 

 

59,150

 

 

 

60,150

 

Property and equipment, net of accumulated depreciation of approximately $202,000 and $188,000, respectively

 

 

285,594

 

 

 

299,320

 

Intangible assets

 

 

100,504

 

 

 

100,504

 

Deposits

 

 

1,425

 

 

 

1,425

 

Deferred tax assets

 

 

358,781

 

 

 

343,444

 

Total Assets

 

$

1,915,993

 

 

$

2,046,148

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

118,582

 

 

$

171,828

 

Payroll accruals

 

 

15,170

 

 

 

15,844

 

Accrued liabilities

 

 

285,321

 

 

 

346,623

 

Unearned revenue

 

 

 

 

 

188

 

Accrued marketing fund

 

 

153,020

 

 

 

147,227

 

Customer deposits

 

 

5,000

 

 

 

5,000

 

Total Current Liabilities

 

 

577,093

 

 

 

686,710

 

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 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

 

 

(1,162,228

)

 

 

(1,141,690

)

Total Stockholders’ Equity

 

 

1,338,900

 

 

 

1,359,438

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

1,915,993

 

 

$

2,046,148

 




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


1



 


CREATIVE LEARNING CORPORATION

Consolidated Statements of Operations

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

Initial franchise fees

 

$

130,000

 

 

$

382,700

 

Royalties fees

 

 

608,826

 

 

 

562,221

 

Merchandise sales

 

 

60

 

 

 

53

 

 

 

 

738,886

 

 

 

944,974

 

Operating expenses:

 

 

 

 

 

 

 

 

Franchise consulting and commissions

 

 

85,065

 

 

 

152,690

 

Franchise training and expenses

 

 

26,631

 

 

 

79,587

 

Salaries and payroll taxes

 

 

159,277

 

 

 

329,074

 

Advertising

 

 

12,104

 

 

 

152,327

 

Professional fees

 

 

397,771

 

 

 

842,478

 

Office expense

 

 

1,885

 

 

 

18,512

 

Bad debt expense

 

 

41,692

 

 

 

15,856

 

Depreciation

 

 

13,726

 

 

 

9,522

 

Other general and administrative expenses

 

 

39,944

 

 

 

159,113

 

Total operating expenses

 

 

778,095

 

 

 

1,759,159

 

Loss from operations

 

 

(39,209

)

 

 

(814,185

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income - net

 

 

3

 

 

 

1,738

 

Legal settlement

 

 

 

 

 

(75,000

)

Other income

 

 

13,432

 

 

 

37,306

 

Total other income (expense)

 

 

13,435

 

 

 

(35,956

)

Loss before benefit from income taxes

 

 

(25,774

)

 

 

(850,141

)

 

 

 

 

 

 

 

 

 

Benefit from income taxes

 

 

5,236

 

 

 

327,160

 

Net loss from continuing operations

 

 

(20,538

)

 

 

(522,981

)

Discontinued operations

 

 

 

 

 

 

 

 

Operating loss from discontinued operations

 

 

 

 

 

(11,886

)

Income tax benefit

 

 

 

 

 

4,574

 

Loss from discontinued operations

 

 

 

 

 

(7,312

)

Net loss

 

$

(20,538

)

 

$

(530,293

)

Net loss per share

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.00

)

 

$

(0.04

)

Discontinued operations

 

$

(0.00

)

 

$

(0.00

)

Total

 

$

(0.00

)

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number of common shares outstanding

 

 

12,001,409

 

 

 

12,001,409

 





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


2



 


CREATIVE LEARNING CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)


 

 

For the Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(20,538

)

 

$

(530,293

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

 

 

7,312

 

Depreciation

 

 

13,726

 

 

 

9,522

 

Bad debt expense

 

 

41,692

 

 

 

15,856

 

Deferred income taxes

 

 

(15,337

)

 

 

6,560

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

1,514

 

 

 

45,317

 

Accounts receivable

 

 

(37,911

)

 

 

112,635

 

Prepaid expenses

 

 

(48,575

)

 

 

8,102

 

Notes receivable

 

 

(32,556

)

 

 

28,682

 

Deposits

 

 

 

 

 

5,000

 

Accounts payable - related parties

 

 

 

 

 

(240

)

Accounts payable

 

 

(53,246

)

 

 

177,554

 

Accrued liabilities

 

 

(61,302

)

 

 

(264,123

)

Unearned revenue

 

 

(188

)

 

 

(35,900

)

Payroll accruals

 

 

(674

)

 

 

(5,040

)

Accrued marketing

 

 

5,793

 

 

 

(13,629

)

Customer deposits

 

 

 

 

 

(9,982

)

Income tax receivable

 

 

7,338

 

 

 

(336,289

)

Net cash used in operating activities

 

 

(200,264

)

 

 

(778,956

)

Net cash provided by discontinued operations

 

 

 

 

 

19,797

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

 

 

 

(39,376

)

Net cash used in investing activities

 

 

 

 

 

(39,376

)

Net change in cash

 

 

(200,264

)

 

 

(798,535

)

Cash, beginning of period

 

 

276,685

 

 

 

2,450,609

 

Cash, end of period

 

$

76,421

 

 

$

1,652,074

 

 

 

 

 

 

 

 

 

 

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


3



 


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) 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 December 31, 2016, BFK franchisees operated in 637 territories in 43 states and 43 countries, and SF franchisees operated in 13 territories in 4 states and 3 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 three months ended December 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, 2016. In addition, refer to Note 6 regarding the sale of Challenge Island 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 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 $161,000 and $162,000 at December 31, 2016 and September 30, 2016, respectively, 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).





4



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 December 31, 2016 and September 30, 2016 are adequate, but actual write-offs could exceed the recorded allowance.


Property, Equipment and Depreciation


Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, which range from three to forty years. Expenditures for additions and improvements are capitalized, while repairs and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is recorded in the year of disposal.


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 December 31, 2016 and September 30, 2016 the Company had approximately $-0- and $188, 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 December 31, 2016 and 2015 of approximately $12,000 and $152,000, 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.


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.




5



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 December 31, 2016 and September 30, 2016, respectively, and has not recognized interest and/or penalties during the three months ended December 31, 2016, 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 2012 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 second 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. While the company is still evaluating the overall impact, the Company does not expect the adoption of this new standard to significantly change revenue recognized under its franchise sales and royalty agreements.


In March 2016 the FASB issued ASU No. 2016-09, C ompensation - 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. Considering we have no significant outstanding option agreements currently, the adoption of this standard is not expected to be material.




6



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 $75,023 and $81,583 from deferred costs to long-term deferred tax liability in December of 2015 and September of 2015, respectively.


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.


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. 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.


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 filed with the SEC a preliminary consent revocation statement in connection with the consent solicitation being conducted by Mr. Pappas and FranVentures, which provides a more detailed explanation the Board’s reasons for opposing Mr. Pappas’ attempt to gain control of the Company. 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 is the Company’s President and Secretary and a former director and founder of the Company. There were no travel and expense reimbursements paid for the three months ending December 31, 2016 and 2015. The related party payable was $-0- at December 31, 2016 and 2015. 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.


The Company had $6,678 in rent expense for the three months ended December 31, 2015 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.




7



CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 


(3) Notes and Other Receivables


At December 31, 2016 and September 30, 2016 respectively, 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 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 the collectability of all receivables and reserves accordingly.


 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

Thereafter

 

 

Total

 

Payment schedules for Notes Receivable

 

$

73,447

 

 

$

23,500

 

 

$

12,950

 

 

$

12,950

 

 

$

17,487

 

 

$

140,334

 


(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 December 31, 2016 and September 30, 2016, the accrued marketing fund liability balances were approximately $153,000 and $147,000, respectively.


(5) Accrued Liabilities


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


 

 

December 31,

 

 

September 30,

 

Accrued Liabilities

 

2016

 

 

2016

 

Accrued Audit Fees

 

$

79,632

 

 

$

13,753

 

Accrued Legal Fees

 

 

123,145

 

 

 

131,504

 

Accrued Legal Settlements

 

 

52,000

 

 

 

17,000

 

Accrued State Regulatory Settlement

 

 

11,955

 

 

 

149,366

 

Accrued Other

 

 

18,589

 

 

 

35,000

 

 

 

$

285,321

 

 

$

346,623

 


The Company accrued $104,450 for state penalties and costs and reimbursement of two franchisees as of September 31, 2015. As of December 31, 2016, this has been partially paid, and the Company has accrued approximately $12,000 for these same costs.


(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.




8



CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 


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


 

 

Three months

 

Operating Loss on discontinued operations

 

ended 12/31/2015

 

Revenue

 

$

(5,971

)

Advertising and Promotion

 

 

(7,635

)

Bad Debt

 

 

 

Commissions and Consulting

 

 

 

Franchisee expense

 

 

 

Professional fees

 

 

 

Office expense

 

 

 

Depreciation expense

 

 

 

General and Administrative Expenses

 

 

1,720

 

Operating Loss on discontinued operations

 

$

(11,886

)


(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.


Rent expense was approximately $3,000 and $14,000, respectively, for the three months ended December 31, 2016 and 2015.


Included in the rent expense for the three months ended December 31, 2015, was $6,678 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.




9



CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 


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. Discovery continues. 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”. The Company has agreed to defendants’ request for additional time to obtain replacement counsel and to respond to discovery the Company has served on them.


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.


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.



10



CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 


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.


a.

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.

b.

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”).

c.

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.

i.

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.

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.

d.

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.

e.

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.

f.

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.

g.

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.




11



CREATIVE LEARNING CORPORATION

Notes to Financial Statements

 


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


On January 25, 2017, Creative Learning Corporation (the “Company”) appointed Karla Kretsch as Chief Operating Officer, effective immediately. Ms. Kretsch, age 52, served as Director of Operations of a Bricks 4 Kidz franchise from 2010 until her appointment with the Company. Ms. Kretsch also served as a Project Consulting Manager for Vaco, a national consulting and talent solutions firm, from 2014 to April 2016. From 1990 to 2009 Ms. Kretsch held various positons with Wells Fargo & Company, including operational risk manager and automobile finance group project management manager. Ms. Kretsch holds a Bachelor of Science from Arizona State University, and is a certified public accountant in California (inactive).


Ms. Kretsch will receive equity grants on the last day of each calendar quarter, as follows (the “Equity Awards”): (1) stock grants valued at $2,000 for the quarter ended March 31, 2017 and $2,500 for each subsequent quarter, and (2) option grants valued at $7,000 for the quarter ended March 31, 2017 and $8,750 for each subsequent quarter, in each case based on the average closing value of the Company’s stock over the applicable period. Ms. Kretch would be entitled to the acceleration of all such equity compensation if the Company is taken private during the term of the Employment Agreement.





12



 


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 December 31, 2016, the Company had 701 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.


1 st Quarter 2017 Highlights


The Company experienced a period of modest retraction in the number of operating franchises, as of December 31, 2016 compared to December 31, 2015, from 698 operating franchises to 650 operating franchises within the two brands. Initial franchise fees were $252,700 lower when comparing the quarter ending December 31, 2016 and the previous year period. 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. Royalties fees were up approximately $47,000 when compared to the quarter ending December 31, 2015. The increase is related to larger International franchise royalties in the period ending December 31, 2016.


Operating Expenses decreased to approximately $778,000 in the quarter ending December 31, 2016 from approximately $1,759,000 in the quarter ending December 31, 2015 or $981,000, due to significant decreases in professional fees of $445,000, in salaries and payroll taxes of $170,000, and in advertising expense of $140,000. A large portion of the higher professional fees in the first quarter of 2016 was related to issues that resulted from the prior management decisions.


The net loss for the quarter ending December 31, 2016 was $21,000 which was an improvement of $510,000, primarily due to a decrease in operating expenses.


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 quarters ending December 31, 2016 and 2015, the Company purchased property and equipment totaling approximately $-0- and $40,000.


Item 3. Quantitative and Qualitative Disclosures About Market Risk.


Not applicable to us as a smaller reporting company.




13



 


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 three months ended December 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 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.


In our 2016 Annual Report on Form 10-K, the Company concluded internal controls over financial reporting were effective on September 30, 2016.








14



 


PART II

 

Item 1. Legal Proceedings


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. Discovery continues. 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”. The Company has agreed to defendants’ request for additional time to obtain replacement counsel and to respond to discovery the Company has served on them.


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.




15



 


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 fraud, conversion of company assets, and breaches of fiduciary duty that the Company alleges that defendants perpetrated upon CLC.


a.

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.

b.

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”).

c.

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.

i.

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.



16



 


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.

d.

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.

e.

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.

f.

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.

g.

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.


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.




17



 


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





18



 


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: February 13, 2017

By:

/s/ Rod Whiton

 

 

Rod Whiton,

 

 

Interim Chief Executive Officer

(Principal Executive Officer)

 

 

 

Dated: February 13, 2017

By:

/s/ Christian Miller

 

 

Christian Miller,

 

 

Chief Financial Officer

(Principal Accounting Officer)


 




19



 


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




20


Creative Learning (PK) (USOTC:CLCN)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Creative Learning (PK) Charts.
Creative Learning (PK) (USOTC:CLCN)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Creative Learning (PK) Charts.