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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 June 30, 2014

o 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.)
 
701Market 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) 

Check 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 x No o

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small 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 o Accelerated filer o
Non-accelerated filer o Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 11,809,409 shares of common stock as of August 18, 2014.
 


 
 

 

 
 
CREATIVE LEARNING CORPORATION

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Quarter Ended June 30, 2014
 
 
 
 
 
2

 
 
CREATIVE LEARNING CORPORATION
Consolidated Financial Statements
(Unaudited)

TABLE OF CONTENTS
 
    Page  
CONSOLIDATED FINANCIAL STATEMENTS      
         
Unaudited condensed consolidated balance sheets     4  
Unaudited condensed consolidated statements of operation     5  
Unaudited condensed consolidated statements of cash flows     6  
Notes to unaudited condensed consolidated financial statements     7  
 
 
3

 
 
CREATIVE LEARNING CORPORATION
Condensed Consolidated Balance Sheets
 
   
(Unaudited)
   
(Audited)
 
   
June 30,
   
September 30,
 
   
2014
   
2013
 
Assets
Current Assets:            
Cash
  $ 3,418,549     $ 2,004,947  
Accounts receivable, less allowance for doubtful
               
accounts of $9,402 and $10,000, respectively
    383,022       310,150  
Prepaid expenses
    37,895       826  
Other receivables - current portion
    125,093       94,301  
Deferred tax asset
    1,058       1,058  
Total Current Assets
    3,965,617       2,411,282  
                 
Note receivable from related party
    70,000       70,000  
Other receivables - net of current portion
    50,867       37,491  
Property and equipment, net of accumulated depreciation
               
of $87,863 and $60,073, respectively
    330,961       294,863  
Intangible assets
    125,754       95,270  
Deposits
    6,425       15,000  
Total Assets
  $ 4,549,624     $ 2,923,906  
                 
Liabilities and Stockholders’ Equity
Current Liabilities:
               
Accounts payable:
               
Related parties
  $ 14,405     $ 5,690  
Third party
    309,617       171,889  
Payroll accruals
    27,902       13,105  
Unearned revenue
    95,900       35,900  
Accrued liabilities
    147,600        
Accrued marketing fund
    161,259       100,754  
Customer deposits
    59,975       120,001  
Income tax payable
    221,221       13,131  
Notes payable:
               
Related parties
    20,000       20,000  
Other
    68,055       3,560  
Total Current Liabilities
    1,125,934       484,030  
Notes payables - net of current portion
    5,000       5,297  
Total Liabilities
    1,130,934       489,327  
Stockholders’ Equity:
               
 Preferred stock, $.0001 par value; 10,000,000 shares authorized;
               
-0- and -0- shares issued and outstanding, respectively
           
 Common stock, $.0001 par value; 50,000,000 shares authorized;
               
11,809,409 and 11,809,409 shares issued and outstanding, respectively
    1,181       1,181  
 Additional paid-in capital
    2,179,210       2,157,673  
 Retained earnings
    1,238,299       275,725  
Total Stockholders’ Equity
    3,418,690       2,434,579  
Total Liabilities and Stockholders’ Equity
  $ 4,549,624     $ 2,923,906  
 
The accompanying notes are an integral part of the condensed consolidated financial statements
 
 
4

 
 
CREATIVE LEARNING CORPORATION
Condensed Consolidated Statements of Operations
 
   
(Unaudited)
   
(Unaudited)
 
   
For The Three
   
For The Nine
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Revenues:
                       
Initial franchise fees
 
$
1,605,899
   
$
1,280,871
   
$
4,674,372
   
$
2,731,471
 
Royalty fees
   
504,265
     
279,176
     
1,245,688
     
658,453
 
Corporate Creativity Center sales
   
3,618
     
26,006
     
70,818
     
86,559
 
     
2,113,782
     
1,586,053
     
5,990,878
     
3,476,483
 
Operating expenses:
                               
Franchise consulting and commissions:
                               
Related parties
   
205,187
     
144,689
     
636,639
     
389,961
 
Other
   
442,874
     
370,971
     
1,188,404
     
902,463
 
Franchise training and expenses
   
122,700
     
82,963
     
348,355
     
202,768
 
Salaries and payroll taxes
   
264,774
     
136,610
     
700,200
     
405,081
 
Advertising
   
263,860
     
132,356
     
627,467
     
326,981
 
Professional fees
   
97,135
     
20,707
     
226,752
     
86,020
 
Office expense
   
49,504
     
27,649
     
232,245
     
115,341
 
Depreciation
   
10,061
     
8,749
     
29,539
     
22,008
 
Stock based compensation
   
     
     
21,537
     
 
Other general and administrative expenses
   
147,243
     
95,836
     
479,415
     
351,824
 
Total operating expenses
   
1,603,338
     
1,020,530
     
4,490,553
     
2,802,447
 
Income from operations
   
510,444
     
565,523
     
1,500,325
     
674,036
 
                                 
Other income (expense):
                               
Interest (expense)
   
     
     
(2
)
   
(1,995
)
Other income (expense)
   
6,796
     
(460
)
   
50,267
     
(21,072
)
Total other income (expense)
   
6,796
     
(460
)
   
50,265
     
(23,067
)
Income before provision for income taxes
   
517,240
     
565,063
     
1,550,590
     
650,969
 
                                 
Provision for income taxes (Note 1)
   
199,167
     
     
588,016
     
 
Net Income
 
$
318,073
   
$
565,063
   
$
962,574
   
$
650,969
 
                                 
Net Income per share
                               
Basic
 
$
0.03
   
$
0.05
   
$
0.08
   
$
0.06
 
Basic Weighted average number of common shares outstanding
   
11,809,409
     
11,611,770
     
11,809,409
     
11,611,770
 
Diluted
 
$
0.03
   
$
0.05
   
$
0.08
   
$
0.06
 
Diluted Weighted average number of common shares outstanding
   
11,854,528
     
11,611,770
     
11,854,528
     
11,611,770
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements
 
 
5

 
 
CREATIVE LEARNING CORPORATION
Condensed Consolidated Statements of Cash Flows
 
   
(Unaudited)
 
   
For the Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2014
   
2013
 
Cash flows from operating activities:
           
Net income
 
$
962,574
   
$
650,969
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation
   
29,539
     
22,008
 
Loss on disposal of assets
   
1,476
     
 
Gain on sale of assets
   
(18,335
)
   
 
Materials purchased with notes payables
   
26,300
     
 
Compensatory equity issuances
   
21,537
     
71,800
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(72,872
)
   
(76,757
)
Accounts payable
   
146,443
     
124
 
Payroll accruals
   
14,797
     
523
 
Accrued liabilities
   
147,600
     
 
Accrued marketing funds
   
60,505
     
33,756
 
Customer deposits
   
(60,026
)
   
15,000
 
Deposits
   
8,575
     
18,000
 
Income tax payable
   
208,090
     
 
Other receivables
   
(4,743
)
   
10,957
 
Prepaid expenses
   
(37,069
)
   
6,645
 
Unearned revenue
   
60,000
     
 
Net cash provided by operating activities
   
1,494,391
     
753,025
 
Cash flows from investing activities:
               
Property and equipment purchases
   
(61,113
)
   
(25,991
)
Intangible asset purchases
   
(10,000
)
   
(67,800
)
Intangible asset sale
   
25,900
     
 
Net cash (used) by investing activities
   
(45,213
)
   
(93,791
)
Cash flows from financing activities:
               
Issuance of notes payables
   
3,000
     
 
Notes payable
   
(38,576
)
   
(23,500
)
Net cash (used) by financing activities
   
(35,576
)
   
(23,500
)
Net change in cash
   
1,413,602
     
635,734
 
Cash, beginning of period
   
2,004,947
     
1,041,786
 
                 
Cash, end of period
 
$
3,418,549
   
$
1,677,520
 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Income taxes
 
$
375,397
   
$
 
Interest
 
$
2
   
$
1,995
 
Supplemental non-cash investing and financing activities:
               
Intangible assets acquired with notes payables
 
$
67,474
   
$
 
Intangible assets sold with notes receivables
 
$
39,425
   
$
 
Equipment acquired with notes payables
 
$
6,000
   
$
 
Materials acquired with notes payables   $ 26,300      
 

The accompanying notes are an integral part of the condensed consolidated financial statements
 
 
6

 
 
CREATIVE LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Creative Learning Corporation (“CLC”), formerly B2 Health, Inc., was incorporated March 8, 2006 in the State of Delaware. BFK Franchise Company LLC (“BFK”) was formed in the State of Nevada on May 19, 2009. Effective July 2, 2010, CLC was acquired by BFK in a transaction classified as a reverse acquisition. CLC concurrently changed its name from B2 Health, Inc. to Creative Learning Corporation. The financial statements represent the activity of BFK from May 19, 2009 forward, and the consolidated activity of BFKF and CLC from July 2, 2010 forward. BFK and CLC are hereinafter referred to collectively as the "Company".

In addition to the accounts of CLC and BFK, the accompanying consolidated financial statements include the accounts of CLC’s subsidiaries, BFK Development Company LLC (“BFKD”) from November 25, 2009 (BFKD’s inception) forward, CI Franchise Company LLC (“CI”) from September 14, 2012 (CI’s inception) forward, and Sew Fun Franchise Company LLC (SF) from January 8, 2013 (SF’s inception) forward.

Creative Learning Corporation operates through its wholly owned subsidiaries BFK FRANCHISE COMPANY, LLC, BFDK Development Company, LLC, CI FRANCHISE COMPANY, LLC AND SEW FUN FRANCHISE COMPANY, LLC under the trade names Bricks 4 Kidz®, Challenge Island®, and Sew Fun Studios™ respectively, that offer children's enrichment and education franchises.

Basis of Presentation

The following (a) condensed balance sheet as of September 30, 2013, which has been derived from audited financial statements, and (b) the unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K originally filed with the SEC on January 14, 2014 and amendment No. 1 filed with the SEC on June 5, 2014. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year. Notes to the condensed financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2013 as reported in the Form 10-K and Form 10-K/A have been omitted.
 
Summary of Significant Accounting Policies

This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s financial statements. The condensed consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
 
 
7

 
 
CREATIVE LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation. The reclassifications did not have any effect on the prior year net loss.

Accounts receivable

The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary.

Revenue recognition

Revenue is recognized on an accrual basis after services have been performed under contract terms, 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 leave training. The franchise fees are fully collectible as of the date of the signing of the franchise agreement, but the franchise fees are not recognized as revenue until the last day they complete training when substantially all of the services required by the franchise agreement have been provided by the Company. Royalty fees are recognized as earned.

As of June 30, 2014 and September 30, 2013, the Company had $95,900 and $35,900, respectively, in unearned revenue for franchise fees collected but for which franchisees had not completed training.
 
 
8

 
 
CREATIVE LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income tax

The Company accounts for income taxes pursuant to ASC 740. Under ASC 740 deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

For the nine months ended June 30, 2014 and 2013, the Company recorded a tax provision of $588,016 and $-0- respectively on its pretax income of $1,550,590 and $650,969 respectively. The tax provision does not include any tax provision or benefit for certain foreign currency remeasurement gains and losses that are not recognized in any tax jurisdiction
 
The tax provision for the nine month period ended June 30, 2014 is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss. During the year, management regularly updates forecasted annual pretax results. To the extent that actual fiscal year ending September 30, 2014 pretax results for income or loss vary from estimates, the actual tax provision or benefit recognized for the fiscal year ending September 30, 2014 could be materially different from the forecasted amount used to estimate the tax provision for the nine months ended June 30, 2014.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs for the nine month periods ended June 30, 2014 and 2013 were $627,467 and $326,981, respectively.
 
 
9

 
 
CREATIVE LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Notes and Other Receivables

In July of 2013, the Company made a $70,000 loan to a related party company, personally guaranteed by the related party, at 6% interest, monthly interest only payments and fully due and payable by July 1, 2015. The Note is convertible up to the maturity date to unrestricted shares in the related party company for any unpaid balance at $0.35 per share.

At June 30, 2014 and September 30, 2013, the Company had notes receivables from related parties of $70,000 and $70,000, respectively.

At June 30, 2014 the Company held certain notes and other receivables totaling $175,960, of which $153,310 was for extended payment terms of Franchise Fees, generally non-interest bearing notes with monthly payments, payable within one to two years, and Foreign Tax Credits of $22,650. These receivables are reported in the accompanying financial statements as current and long term other receivables in the accompanying financial statements.

At September 30, 2013, the Company had notes and other receivables of $131,792.
 
Intangible Assets
 
The following is a summary of changes to intangible assets for the nine months ending June 30, 2014.
 
   
Beginning
               
Ending
 
   
Balance
               
Balance
 
   
September 30,
2013
   
Acquisitions
   
Sales
   
June 30,
2014
 
                         
Intangible assets
  $ 95,270     $ 77,474     $ (46,990 )   $ 125,754  
 
Notes Payables

In September 2012 the Company issued a non-interest bearing promissory note of $40,000 to a related party for consulting services provided and payable by the issuance of 40,000 shares of the Company’s common stock. As of June 30, 2014 and September 30, 2013 the remaining balance on this promissory note was $20,000 and $20,000 respectively. This liability is reported in the accompanying financial statements as notes payable, related party, and will be paid with the issuance of the remaining 20,000 shares during the remainder of fiscal year 2014.

In December of 2013, the Company entered into a settlement agreement to purchase three territories from a Nevada franchisee as an intangible asset of $67,474 and $6,000 as fixed asset signage and $26,300 in materials that were expensed. As part of this settlement, the Company agreed to two non-interest bearing notes, payable in monthly installments over the next eighteen months. As of June 30, 2014 the remaining balance for these notes was $70,000 and is reported in the accompanying financial statements as portions of the current and long term notes payables.
 
On June 30, 2014 and September 30, 2013 the Company owed $3,055 and $8,857, respectively, in deferred commission payments, non-interest bearing, payable in monthly payments, on deferred payment schedules related to extended payment terms of Franchise Fees.
 
For the nine months ending June 30, 2014 and 2013, the Company reduced notes payables with principal payments of $38,576 and $23,500, respectively.
 
 
10

 
 
CREATIVE LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
Accrued liabilities
 
During the period ended June 30, 2014, the Company awarded an outside broker a commission bonus for performance in international sales, payable by the issuance of 60,000 shares of restricted common stock.  The fair market value on the date of the award was $2.46 per share and the Company recorded the commission expense of $147,600.  As of June 30, 2014, none of the 60,000 shares had been issued.
 
Accrued liabilities consisted of the following as of:
 
   
June 30,
   
December 31,
 
   
2014
      2013  
                 
Accrued sales commissions
  $ 147,600     $  
 
Employee stock options
 
The Company accounts for non-employee stock options under ASC 718, whereby option costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Unless otherwise provided for, the Company covers option exercises by issuing new shares.
 
There were 50,000 shares of stock options issued and outstanding as of September 30, 2013. At June 30, 2014 these share options were still outstanding.
 
During the nine month period ended June 30, 2014, the Company issued an additional 70,000 common stock purchase options (50,000 divided among three employees and 20,000 to an officer/director), allowing the holders to purchase one share of common stock per option, vesting on October 1, 2014 and exercisable at $1.55 per share with an expiration date of December 31, 2016. At June 30, 2014 these share options were still outstanding. The estimated was $56,000 on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 3.00%, dividend yield of 0%, expected lives estimated at two years, cumulative volatility of 100.00%.
 
As of June 30, 2014 there were a total of 120,000 shares of stock options issued and outstanding.
 
The company incurred and recorded compensation expense of $21,537 and $0 for the nine months ending June 30, 2014 and 2013, respectively.

The Company is amortizing the estimated fair market value to stock based compensation expense in the accompanying consolidated statement of operations.  For the nine month period ended June 30, 2014 the Company has recognized approximately $21,000 of expense.
 
Earnings per share

FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the denominator of the basic and diluted earnings (loss) per share (EPS) computations.

Basic earnings per share are computed by dividing the net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares are dilutive.
 
 
11

 
 
CREATIVE LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
The Company’s potential dilutive securities for employee stock options for the three and nine months ended June 30, 2014 and 2013 are 45,119 and -0-, respectively.

The following table sets forth the computation of basic and diluted net income (loss) per share:
 
   
Three months
ended
June 30, 2014
   
Three months
ended
June 30, 2013
 
             
Net income attributable to common stockholders
 
$
318,073
   
$
565,063
 
                 
Basic weighted average outstanding shares of common stock
   
11,809,409
     
11,611,770
 
                 
Net income per share of common stock, basic
 
$
0.03
   
$
0.05
 
                 
Dilutive effect of common stock equivalents
   
45,119
     
-
 
                 
Dilutive weighted average common stock equivalents
   
11,854,528
     
11,611,770
 
                 
Net income per share of common stock, diluted
 
$
0.03
   
$
0.05
 
 
   
Nine months
ended
June 30, 2014
   
Nine months
ended
June 30, 2013
 
             
Net income attributable to common stockholders
 
$
962,574
   
$
650,969
 
                 
Basic weighted average outstanding shares of common stock
   
11,809,409
     
11,611,770
 
                 
Net income per share of common stock, basic
 
$
0.08
   
$
0.06
 
                 
Dilutive effect of common stock equivalents
   
45,119
     
-
 
                 
Dilutive weighted average common stock equivalents
   
11,854,528
     
1,611,770
 
                 
Net income per share of common stock, diluted
 
$
0.08
   
$
0.06
 
 
 
12

 
 
CREATIVE LEARNING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Segment Information
 
The Company operates in one segment in accordance with Financial Accounting Standards Board ("FASB") ASC Topic 280, Segment Reporting.  Our Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
 
Recently Adopted Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations

Subsequent Events

Between July 1, 2014 and August 18, 2014 BFK Franchise Company, sold 8 new US franchises, 2 new international franchises and 1 master franchise. During this period CI Franchise Company sold 3 new US franchises.

 
13

 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Plan of Operation

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto contained in this report.

Results of Operations

BFK, which conducts business under the trade name BRICKS 4 KIDZ®, offers programs designed to teach principles of engineering, architecture and physics to children ages 3-12+ using LEGO® bricks. The Company provides classes (both in school and after school), special events programs and day camps that are designed to enhance and enrich the traditional school curriculum, trigger young children’s lively imaginations and build self-confidence. BFK’s programs foster creativity and provide a unique atmosphere for students to develop problem solving and critical thinking skills by designing and building machines, catapults, pyramids, race cars, buildings and numerous other systems and devices using LEGO® bricks.

BFK operates primarily through a mobile franchise model.

BFK sold its first franchise in September 2009 and as of June 30, 2014, BFK has sold 554 franchises, operating in 40 states, the District of Columbia, Puerto Rico and 28 foreign countries.

On September 14, 2012, the Company formed CI Franchise Company LLC (“CI”) as a wholly owned subsidiary for purpose of operating a second franchise concept known as Challenge Island®, which provides unique challenge-based programs designed to foster critical and creative thinking skills, problem solving methodology, and core STEM (Science, Technology, Engineering, Mathematics) principles in children ages 3-13+. CI began selling franchises during the 2013 fiscal year.

As of June 30, 2014 CI has sold 26 franchises in the United States and 1 foreign country.
 
 
14

 

On January 8, 2013 the Company formed Sew Fun Franchise Company LLC (“SF”) as a wholly owned subsidiary for the purpose of operating a third franchise concept known as Sew Fun. Sew Fun is a brick and mortar business featuring stores/studios located in strip malls and offering after-school classes, camps and birthday parties for children ages 8-13+, as well as adult classes, in fashion design.

The Company is in the process registering SF with state franchising regulators, and as of June 30, 2014, three state registrations have been completed and no SF franchises had been sold.

Unless otherwise indicated, all references to the Company include the operations of BFK, BFKD, CI and SF.

BFK sells franchises both domestically and internationally. International franchise sales can be a single franchise or a Master Franchise, where the Master Franchisee operates a franchise, but is also able to develop, sell and manage sub-franchises. International franchise and Master Franchise fees vary and are set relative to the potential of the franchised territories.

The Company sold 147 domestic and 39 international franchises during the nine months ending June 30, 2014 compared to 121 domestic and 12 international franchises for the same period in 2013. The average fee the Company received for a franchise during the nine months ended June 30, 2014 was approximately $25,131, compared to approximately $19,750 during the nine months ended June 30, 2013. The increase in the average fee was due to seven Master Franchises sold at an average price of $140,700 per franchise. The increase in the average fee during the current period was partially offset by the sale of 55 multiple BFK franchises at a discount to the typical franchise fee of $25,900 and the sale of two CI franchise at a discounted price of $7,500 to a BFK franchisee.

Although the typical BFK franchise fee is $25,900, if a franchisee buys more than one franchise at the time the initial franchise is purchased, the fee for the other territory is approximately $10,000 to $12,000.

The typical fee for a CI franchise is $17,500 compared to a fee of approximately $25,900 for a BFK franchise.

The Company expects that its franchise fee revenue will continue to increase during the fiscal year ending September 30, 2014 as additional franchises are sold.
 
 
15

 
 
Royalty Fees increased by $587,235 for the nine months ending June 30, 2014 over the same period in 2013, with an increase of $372,247 collected from franchisees that have been in the system one year or longer, and $214,988 from new franchisees that entered the system within the last 12 months.
 
Royalty Fees will continue to grow with the increase in the number of franchisees and the increase in the amount of time franchisees have been in the system.

Other material changes of items in the Company’s Statement of Operations for the three and nine months ended June 30, 2014, as compared to the same period in 2013, are discussed below.

Item
 
Increase (I) or
Decrease (D)
 
Reason
         
Revenues
 
I
 
Sale of more franchises, fuelled by increased expenditures in advertising and brand awareness, and increase in royalties paid by established franchises.
         
Franchise consulting and commissions
 
I
 
Increased sales of franchises.
         
Franchise training and expenses
 
I
 
An increase in the number Franchises sold increased attendance in training classes.
Salaries and payroll taxes
 
I
 
Increase in staff to support the growth of the business.
Advertising
 
I
 
Increased expenditures to grow the business.
Professional fees
 
I
 
Services required for international franchises and trademarking.
Office expense
 
I
 
Increased printing, office supplies, lego supplies and office expenses to support the growth of the Company.
Other general and administrative expenses
 
I
 
Growth of the Company.
Provision for income taxes
 
I
 
Income tax liabilities due to profits depleting prior net operating loss carryovers.
 
 
16

 

Liquidity and Capital Resources

Sources and (uses) of funds for the nine months ended June 30, 2014 and 2013 were as follows:
 
   
Nine months ended
June 30,
 
   
2014
   
2013
 
                 
Cash provided by operations
   
1,494,391
     
753,025
 
Purchase of property and equipment
   
(61,113)
     
(25,991)
 
Purchase of intangible assets
   
(10,000)
     
(67,800)
 
Sale of intangible assets
   
25,900
     
--
 
Repayment of loans
   
(38,576)
     
(23,500)
 
 
As of June 30, 2014 the Company’s operating cash requirements were approximately $450,000 per month.

The Company anticipates that its capital requirements for the twelve-month period ending June 30, 2015 will be as follows:

Franchise consulting, commissions, training and related expenses
  $ 2,475,000  
Salaries and payroll taxes
  $ 1,135,000  
Advertising
  $ 850,000  
Other operating expenses
  $ 1,350,000  

The Company collects and allocates 2% of the franchisee gross revenues to a marketing fund, managed by the Company, which is used for the 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. The Marketing Fund liability is actually offset with the matching amount of cash in the Marketing Fund bank account.

Contractual Obligations

The Company owns its corporate headquarters, but leases an additional office suite. The following table summarizes the Company’s contractual lease obligations as of June 30, 2014:
 
   
2014
   
2015
   
2016
   
2017
   
2018
   
Total
 
                                                 
Lease of office space
  $ 6,975     $ 27,900     $ 27,900     $ 23,400     $ 17.100     $ 103,275  
                                                 
Notes Payable
  $ 43,055     $ 50,000     $ 0     $ 0     $ 0     $ 93,055  

 
17

 

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity or capital resources.

Outlook

The Company saw another year of significant growth in the sales of franchises in fiscal year 2013 expanding from 210 to 395 franchises sold with its two brands in operation, resulting in increased revenues from franchise fees, including international growth and exposure. That trend continued for the first nine months for the 2014 fiscal year setting a record in new sales revenues and adding an additional 581 BFKF and CI franchises, both domestic and internationally. In addition, with franchisees being in the system longer, there were significant increases in royalty fees.

As a result of this growth, the Company experienced a significant increase in liquidity and expects all of these trends to continue through this fiscal year.

By the end of the 2013 fiscal year, the Company had used all of its startup, tax net loss carryovers, and will be liable for income taxes on reported net income.

Other than as disclosed above, the Company does not know of any significant changes in revenues or expenses or the Company’s expected sources and uses of cash.

Critical Accounting Policies and Recent Accounting Pronouncements

See Note 1 to the Company’s financial statements included as part of this report for a discussion of the Company’s critical accounting policies and recent accounting pronouncements, the adoption of which may have a material effect on the Company’s financial statements.
 
Item 4. Controls and Procedures.

(a) The Company maintains a system of controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“1934 Act”), is recorded, processed, summarized and reported, within time periods specified in the SEC's rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act, is accumulated and communicated to the Company’s management, including its Principal Executive and Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of June 30, 2014, the Company’s Principal Executive and Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Principal Executive and Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

(b) Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2014, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
 
 
18

 
 
PART II
 
Item 1. Legal Proceedings
 
Not applicable.
 
Item 1A. Risk Factors
 
Not applicable.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Not applicable.
 
Item 3. Defaults Upon Senior Securities
 
Not applicable.
 
Item 4. Mine Safety Discolosures
 
Not applicable.
 
Item 5. Other Information
 
None.
 
 
19

 

Item 6. Exhibits

Exhibits
 
31.1
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32
 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act.
 
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
____________
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
20

 
 
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  
       
August 18, 2014
By:
/s/ Brian Pappas  
    Brian Pappas  
    Principal Executive, Financial and Accounting Officer  

 
21