Driveitaway Holdings, Inc. - Quarter Report: 2015 June (Form 10-Q)

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, 2015

¨  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)

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.

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: 11,986,309 shares of common stock as of August 11, 2015.

CREATIVE LEARNING CORPORTION

Form 10-Q

Quarter Ended June 30, 2015

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

CREATIVE LEARNING CORPORATION

Condensed Consolidated Balance Sheets

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

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CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Income

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

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CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Cash Flows

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

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CREATIVE LEARNING CORPORATION

Condensed Consolidated Statements of Cash Flows (Continued)

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

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

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

Nature of Organization

The accompanying condensed consolidated financial statements include the accounts of Creative Learning Corporation (“CLC” or the “Company”) and its wholly owned subsidiaries, BFK Franchise Company LLC (“BFK”), BFK Development Company LLC (“BFKD”), CI Franchise Company LLC (“CI”), Sew Fun Franchise Company LLC (“SEW FUN”) and SF Franchise Company LLC (“SF”) from January 27, 2015.

When used in these notes, the terms "Company,” "we,” "us" or "our" mean Creative Learning Corporation, together with its consolidated subsidiaries.

SF commenced state required registrations and franchises sales under this third franchise concept in the third quarter of fiscal year 2015. SF offers after-school classes, camps and birthday parties for children ages 8 - 13+, as well as adult classes, in fashion design. As of June 30, 2015, SF has granted and sold 4 franchises.

The LLC agreements for BFK, BFKD, CI, SF, and SEW FUN do not have a termination date associated with the life of the organizations. Each of BFK, BFKD, CI, SF and SEW FUN has a single member, controlled 100% by CLC.

CLC operates wholly owned subsidiaries BFK, CI and SF 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 included (a) condensed consolidated balance sheet as of September 30, 2014, which has been derived from audited financial statements, and (b) the unaudited condensed consolidated financial statements as of June 30, 2015 and 2014, 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 Amendment No. 2 (Form 10-K/A) filed with the SEC on March 31, 2015 (the “2014 Annual Report”). 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 2014 as reported in the 2014 Annual Report 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. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

Principles of Consolidation

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

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.

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

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, 2015, the Company had $60,520 in unearned revenue for franchise fees collected but for which franchisees had not completed training.

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 the 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-term assets and the 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.

Recent Accounting Pronouncements

The Company has reviewed all the recent accounting pronouncements issued to date of the issuance of these condensed consolidated financial statements, and does not believe any of these pronouncements will have a material impact on the Company’s condensed consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued guidance codified in ASC 606, “Revenue Recognition – Revenue from Contracts with Customers,” which amends the guidance in former ASC 605, “Revenue Recognition,” and becomes effective beginning January 1, 2017. The Company is currently evaluating the impact of the provisions of ASC 606 on the organization.

Cash and Cash Equivalents

The Company considers all highly liquid securities with original maturities of three months or less when acquired, to be cash equivalents. We had no cash equivalents as of June 30, 2015 and September 30, 2014. The Company had cash of approximately $2,800,000 and $3,100,000 as of June 30, 2015 and September 30, 2014, respectively.

The Company has restricted cash of approximately $195,000 and $180,000 as of June 30, 2015 and September 30, 2014, respectively, associated with marketing funds collected from the franchisees. Per the franchise agreements of BFK and CI, a monthly marketing fund of 2% of gross revenues is collected and held for promotion of the brand. Per the franchise agreements of SF, a fixed monthly fee of $50 is collected and held for promotion of the brand.

The Company has two operating accounts with Wells Fargo, N.A. (“Wells Fargo”) that exceed the $250,000 FDIC limit by approximately $2,300,000. The Company is confident the asset is secure based upon our history with and the stability of Wells Fargo.

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

Equity Instruments Issued to Non-Employees for Acquiring Goods or Services

Issuances of the Company's common stock or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is reached (a "performance commitment" which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete. Although situations may arise in which counter performance may be required over a period of time, the equity award granted to the party performing the service is fully vested and non-forfeitable on the date of the agreement. As a result, in this situation in which vesting periods do not exist as the instruments fully vested on the date of agreement, the Company determines such date to be the measurement date and will record the estimated fair market value of the instruments granted as a prepaid expense and amortize such amount to general and administrative expense in the accompanying statement of operations over the contract period. (See note 13). When it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates.

(2) Related Party Disclosure

During the three and nine months ended June 30, 2015 and 2014, the Company incurred related party (companies related by common control) expenses of:

———————

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

Certain reclassifications were made in the accompanying Condensed Consolidated Statements of Income to the three months ended June 30, 2014 between Franchise consulting and commissions – Related parties and Franchise consulting and commissions – Other in the amount of $19,505, and to the nine months ended June 30, 2014 between Franchise consulting and commissions – Related parties and Franchise consulting and commissions – Other in the amount of $33,095.

In addition, all franchisees pay fees directly to Leap Ahead Learning Company for set-up and monthly support of a franchise management tool (“FMT”). The set-up fee is a one-time charge of $250 and the monthly support fee is $75 which amounts reflect support services provided to the franchisees pursuant to the franchise agreements. Leap Ahead Learning Company, the developer of the FMT, is wholly owned by Dan O’Donnell, who is a director and executive officer of the Company.

(3) Franchise Operations

The Company currently supports independently owned franchises located in 45 states in the United States, 10 Canadian provinces and 38 other countries.

BFK franchises are required to pay the Company an initial franchise fee of $25,900 for a typical sized, domestic, single territory franchise and an additional $10,000 to $12,000 for an additional territory purchased during the initial agreement. Master franchise fees for international territories can vary from $50,000 to over $100,000 depending upon the international region. Royalty fees and marketing fees are also required to be paid by each franchisee. The marketing fee is 2% of gross sales, and the current royalty fee is 7% of gross sales. There is a minimum royalty fee of $1,500 for an initial territory and $750 for an additional territory per 12 week period. For new franchises the royalty fees do not become payable until after their initial 6 months of operations. A limited number of earlier agreements set the royalty fee at 5% if they opened a Creativity Center, but this provision is not in the current agreements. As of June 30, 2015, there were 33 franchises that have been terminated from the beginning of BFK operations and there were 21 franchise territories that are inactive from the beginning of BFK operations. Any terminated or inactive franchise territories can be sold in the open market.

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

CI franchises are required to pay the Company an initial franchise fee of $24,500 for a typical sized, domestic, single territory franchise and an additional $10,000 to $15,000 for an additional territory purchased during the initial agreement. Royalty fees and marketing fees are also required to be paid by each franchisee. The marketing fee is 2% of gross sales, and the current royalty fee is 7% of gross sales. There is a minimum royalty fee of $1,200 for an initial territory and $500 for an additional territory per 12 week period. For new franchises the royalty fees do not become payable until after their initial 6 months of operations. As of June 30, 2015 there were 7 franchises that have been terminated or classified as inactive from the beginning of CI operations.

SF franchises are required to pay the Company an initial franchise fee of $19,500 for a typical sized, domestic, single territory franchise and an additional franchise fee of $12,500 for an additional territory purchased during the initial agreement. Royalty fees and marketing fees are also required of each franchisee. The marketing fee is fixed at $50 per month. The royalty fee is an escalating amount per month starting at $350 per month for the first year and ending at $450 per month for the fifth year. For new franchises the royalty fees do not become payable until after their initial month of operation. As of June 30, 2015, SF has granted 4 franchises, these initial franchises were granted at a discounted franchise fee.

The Company, from time to time, utilizes brokers to market and sell franchises.  In connection with such marketing and sales, these brokers have, from time to time, referred potential franchisees to Seed Capital and Excel Capital for financing. The Company has instructed all of its brokers that going forward it will not permit its brokers to participate in or facilitate any third-party financing for prospective franchisees.

(4) Accrued Marketing Fund

As stated in the terms of the franchise agreements, the Company collects 2% of each 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 that is collect from US and Canadian franchisees is used for the respective country. US funds are used in the United States and Canada funds are used in Canada. The concentration of franchises in any one international area is not large enough to provide a marketing fund benefit.

The marketing fund is used so the owners can participate in regional trade show events and regional and national advertising campaigns. Proposals for use of the marketing fund are accepted from United States and Canadian franchise owners. The marketing fund is not designed to cover individual franchise advertising expenditures opportunities. A few examples of the trade shows and advertising the marketing fund has been used for include: education after school vendor fairs, youth expos, STEM (Science, Technology, Engineering, Mathematics) festivals and homeschool conventions.

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 bank account with a reduction in the liability account.

As of June 30, 2015 and September 30, 2014, the accrued marketing fund liability balances were approximately $195,000 and $180,000 respectively.

(5) 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. These receivables are solely derived from the invoicing of franchises for royalty fees and marketing fees. The Company records an allowance for doubtful accounts 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 are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts as of June 30, 2015 of approximately $74,000 is adequate, but actual write-offs could exceed the recorded allowance. The value of accounts written off against the reserve for the three months ended June 30, 2015 and 2014 was approximately $44,000 and $14,000 respectively, and for the nine months ending June 30, 2015 and 2014 was approximately $55,000 and $17,000 respectively.

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(6) 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 three months ended June 30, 2015 and 2014, the Company recorded a tax provision of approximately $18,000 and $199,000 respectively on its pretax income of approximately $54,000 and $517,000 respectively. For the nine months ended June 30, 2015 and 2014, the Company recorded a tax provision of approximately $92,000 and $588,000 respectively on its pretax income of approximately $245,000 and $1,550,000 respectively.

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

(7) Advertising costs

Advertising costs are expensed as incurred. Advertising costs for the three month periods ended June 30, 2015 and 2014 were approximately $212,000 and $264,000, respectively, and for the nine month periods ended June 30, 2015 and 2014 were approximately $707,000 and $627,000, respectively.

(8) Notes and Other Receivables

In July 2013, the Company loaned $70,000 to a related party company owned by Brian Pappas, AudioFlix, Inc. (“AudioFlix”), in the form of a convertible note at 6% interest, with monthly interest only payments and fully due and payable not before July 1, 2015. The note is personally guaranteed by Brian Pappas and is convertible up to the maturity date to unrestricted shares in AudioFlix for any unpaid balance at $0.35 per share. Management has determined the note could be deemed a violation of Section 13(k) of the Exchange Act and Section 402 of the Sarbanes-Oxley Act and has sought repayment of the note in full. As of June 30, 2015 and September 30, 2014, the principal balance due was $70,000 and $70,000, respectively. On July 31, 2015, the Company, through legal counsel, issued a formal demand to pay the note and interest due. Full payment of the note plus interest was received by the Company on August 12, 2015.

At June 30, 2015 and September 30, 2014, the Company held certain other receivables totaling $226,087 and $171,088, respectively, for extended payment terms of franchise fees, generally through non-interest bearing notes with monthly payments, payable within one to two years. During the three month and nine month periods ended June 30, 2015, the Company wrote off notes receivable from franchises valued at approximately $12,000 and $22,000, respectively. The receivable deemed uncollectible and written-off during the nine months ended June 30, 2015 were in the following territories, Hoboken, NJ, Mead, Co, and St. Martinsville, LA. There were no write-offs in the comparable periods of 2014. The Company held foreign tax credits at June 30, 2015 and September 30, 2014 of approximately $4,000 and $23,000, respectively.

(9) Intangible Assets

At June 30, 2015, the Company had approximately $171,000 of intangible assets. On November 11, 2014, the Company issued 25,000 shares with a fair value of $45,000 (market value at November 11, 2014 of $1.80 per share) to Kidsplorations LLC as part of the original purchase and sale of asset agreement, dated September 14, 2012 relating to the Challenge Island franchise concept. The compensation in the agreement is in the form of CLC common stock to be issued in 25,000 share increments at signing and then, over time, based upon the incremental sales of 25 new CI franchises up to a total of 175 new franchises, or a total of 175,000 common shares. At the time of the signing of such agreement, CLC issued 25,000 shares of CLC common stock at a fair market value of $25,250. The first increment of 25,000 shares issuance, based on 25 franchise sales, occurred on November 11, 2014 at a fair value of $45,000. In the future as each 25 new franchises are sold, the Company will issue 25,000 shares of common stock of CLC to be valued at the fair market value at the date of issue.

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(10) Accrued stock based compensation

On June 23, 2014, the Company agreed to issue 60,000 shares of its common stock for payment relating to commissions earned for master franchise sales at such date. The total value of the 60,000 shares at the date of the agreement was $147,600 (60,000 shares times the fair value of $2.46 per share). The Company recorded the full fair value to commission expense and originally recorded a liability under accrued stock based compensation in the accompanying consolidated statement balance sheet. The first 20,000 shares were issued on July 29, 2014, with the respective $49,200 being re-classed from accrued stock compensation to common stock and additional paid in capital as of September 30, 2014. On November 25, 2014, the remaining 40,000 shares of common stock were issued with the remaining balance of $98,400 being re-classed from accrued stock compensation to common stock and additional paid in capital.

(11) Net earnings per share

ASC 260-10-45, “Earnings Per Share,” requires presentation of “basic” and “diluted” earnings per share on the face of the statements of operations for all entities with complex capital structures. 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 securities 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.

The Company’s potential dilutive securities for employee stock options for the three months ended June 30, 2015 and 2014 are 16,641 and 33,302, respectively, and for the nine months ended June 30, 2015 and 2014 are 26,853 and 37,585, respectively.

The following table sets forth the computation of basic and diluted net income per share:

(12) Stock Issuance

On November 11, 2014, the Company issued 25,000 shares of CLC common stock valued at $45,000 to Kidsplorations, LLC, as part of the purchase of assets agreement for CI. This was based upon the threshold of selling 25 franchises. (See note 9).

On November 25, 2014, the Company issued 40,000 shares of CLC common stock valued at $98,400 to certain independent broker for accrued stock base commissions. This completes the agreement referenced in note 10 above. (See note 10).

On February 18, 2015, the Company issued 85,000 shares of CLC common stock to Sew Fun, LLC (“SFLLC”) as part of a mediated settlement agreement. This settlement terminates the Letter of Intent between CLC and SFLLC, dated October 25, 2012, regarding the purchase and sale of assets between the parties effective December 17, 2012. CLC is relieved of any obligation to pay any sums to SFLLC after January 1, 2015. (See note 13).

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

On March 25, 2015, the Company issued 4,000 shares of CLC common stock as an advisory fee valued at $5,040 ($1.26 market value per share) to The Brewer Group, Inc. (“Brewer Group”) for an agreement for business development and marketing services. The $5,040 was charged to consulting expense during the month of March, 2015. (See note 13).

On May 1, 2015, the Company entered into an agreement with a consulting firm for business development and marketing services. CLC issued 8,000 shares of CLC common stock as an advisory fee valued at $10,080 ($1.26 market value per share) to the consulting firm. The $10,080 was charged to prepaid expenses with equal monthly charge of approximately $2,000 being allocated to consulting expense over the life of the agreement.

On June 18, 2015 the Company issued 10,000 shares of CLC common stock as a commission for the achievement of selling master franchises. The shares were valued at the stock value as of the date of issue, which totaled $6,300. The $6,300 was charged against an accrued liability that had been established on September 30, 2014.

On January 26, 2015, the Company’s board of directors approved a plan pursuant to Securities and Exchange Commission Rule 10b-18 to purchase 100,000 shares of its common stock in the secondary market. As of June 30, 2015 the Company has purchased 15,100 shares of CLC common stock at a cumulative cost of approximately $18,000. The value of the treasury stock is recorded in the equity section of the condensed consolidated balance sheet of June 30, 2015.

(13) Commitments and Contingencies

Lease Commitments

The Company has entered into leasing agreements for office space located in St. Augustine, Florida. The contract periods began July, 2014 and end June, 2019. The monthly rent under these agreements is $2,375.

The following table summarizes the Company’s contractual lease obligations as of September 30, 2014:

Rent expense for the three months ended June 30, 2015 and 2014 was approximately $7,000 and $3,000, respectively and for the nine months ended June 30, 2015 and 2014 was approximately $24,000 and $11,000, respectively.

Commitments

On March 6, 2015, the Company entered into an agreement with the Brewer Group, a consulting firm for business development and marketing services. Upon signing the agreement, CLC issued 4,000 shares of CLC common stock as an advisory fee (valued at $5,040 or $1.26 price per share) to the Brewer Group. On May 1, 2015, an additional 8,000 shares (total value $10,080) of CLC stock was issued as part of the advisory fee. Commissions on the successful sale of franchises by the Brewer Group, will be paid based upon the following schedule: Domestic franchise - 30% of franchise sales price plus 2,000 shares of CLC common stock; International franchise - 20% of franchise sales price plus 5,000 shares of CLC common stock. Valuation was based upon ASC 505-50, which states that the fair value of the equity issued should be measured as the earlier of either; (1) Commitment for performance by the counterparty has been reached OR (2) the counterparty’s performance is complete. As the Company determined the contract date to be the measurement date, the Company has recorded prepaid expense and accounts payable in the amount of $10,080 for shares to be issued with non-vesting and non-forfeitable requirements. The Company is amortizing the prepaid amount to expense over the contract period. For the three months ended June 30, 2015, $2,000 was charged to expense, leaving a prepaid balance of $8,080.

The Company customarily pays outside brokers a commission fee for the successful sale of a franchise. A franchisee pays a one-time, non-refundable franchise fee upon the execution of the franchise agreement. Domestically, there can be variations on the franchise fees depending on the size or territories being purchased, and other factors of the territory. The typical sized, domestic, single territory franchise fee for BFK is $25,900. If the 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 size, domestic, single territory franchise fee for CI is $17,500. The commission rate paid the outside broker is typically 25% of the fees collected on an initial territory and 20% on the sale of a subsequent territory. International franchise fees vary and are set relative to the potential of the franchised territories.

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

On July 1, 2014, the Company entered into an agreement with Crescendo Investor Relations (“Crescendo”), for implementation of the Company’s investor relations program. On March 25, 2015, the agreement was renewed to extend to April 1, 2016. The Company is currently in discussions with Crescendo to end the agreement before the end of the fiscal year ending September 30, 2015.

On June 4, 2015, the Company announced the award of the 50^th Challenge Island franchise.  In the agreement to purchase Challenge Island dated September 14, 2012, the Company agreed to issue 25,000 of CLCN common stock for each increment of 25 franchises being awarded.  The 25,000 shares, that are due, will be value as of June 4, 2015 at approximately $21,000 or $0.84 per share. As of this filing the 25,000 shares of CLCN common stock have not been issued nor has the transaction been recorded in the general ledger. (see FN 12)

The Company also pays consulting and commission fees to related parties. The specific arrangements of these agreements are disclosed above in Note 2 with accompanying notes of explanation.

Legal

On September 27, 2013, BFK was named as a co-defendant in a complaint in the 8^th Judicial Court, Clark County Nevada, (Case No. A-13-68287-B), filed by a franchisee in Nevada who had purchased three existing Las Vegas territories from other franchisees. In December 2013, without any further legal process, BFK entered into a settlement with the Nevada franchisee to purchase the three Las Vegas territories for a note in the amount of $95,000. At the fiscal year end September 30, 2014, the outstanding balance of the note was $55,000. During the nine months ended June 30, 2015, payments in the amount of $45,000 were made, leaving a balance due on the note of $10,000. This obligation will be satisfied during the next fiscal quarter.

The Company was involved in arbitration with SFLLC from which the Company previously purchased intellectual property to establish a new sewing franchise concept. On January 23, 2015, the Company and SFLLC entered into a settlement agreement that resolved all outstanding issues with no residual liabilities.

The Company had accrued $106,250 which was the estimated fair market value of the 85,000 shares of common stock to be issued pursuant to this legal settlement under “Legal Settlement” in the accompanying balance sheet at September 30, 2014. The estimated market value of the shares of common stock was $106,250 based on the trading price of the Company’s common stock on the date of the settlement. The 85,000 shares of CLC common stock were issued on February 28, 2015.

In February 2015, the Company was named as defendant in an alleging defamation claim, registered in the circuit court, seventh judicial circuit, in St. Johns County, Florida (Case No. 2015-CA-0174) by a former corporate officer. The action brought by the plaintiff lists damages in excess of $15,000 without any specific total losses. The Company’s management and counsel believe that it is too early to determine the probable outcome of this matter or the loss or range of loss, if any, and the Company intends to contest this case.

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CREATIVE LEARNING CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(14) Subsequent Events

We have evaluated the effects of all subsequent events from July 1, 2015 through the date the accompanying condensed consolidated financial statements were available to be issued.

On July 22, 2015, the Board of Directors removed Brian Pappas as Chief Executive Officer of the Company, effective immediately. Mr. Pappas continues to serve on the Board and remains an employee of the Company on paid leave. Also on July 22, 2015, the Board appointed Rod Whiton as interim Chief Executive Officer of the Company and Michelle Cote as President and Secretary of the Company, each effective immediately. The Board also elected Charles (Chuck) Grant as Chairman of the Board. On July 22, 2015, the Board also elected two additional directors, JoyAnn Kenny-Charlton, Esq. and Michael Gorin, effective immediately. For additional information concerning Mr. Whiton, Ms. Kenny-Charlton and Mr. Gorin, please see the Current Report on Form 8-K filed by the Company on July 28, 2015.

In July 2013, the Company extended a $70,000 convertible note to AudioFlix, Inc. (“AudioFlix”). AudioFlix is a related party company owned by former CEO Brian Pappas. Management has determined the note could be deemed a violation of Section 13(k) of the Exchange Act and Section 402 of the Sarbanes-Oxley Act and has sought repayment of the note in full. On July 31, 2015, the Company, through legal counsel, issued a formal demand to pay the note and interest due. The repayment of the note and interest due was received by the Company on August 12, 2015. (See note 8).

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

Some of the information in this quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements. In some cases you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of a variety of factors such as: foreign and domestic competitors; the ability to continue introducing our services in new areas; domestic and foreign governmental and public policy changes; protection and validity of patent and other intellectual rights; the successful integration of strategic concept offerings and acquisitions; and, the cyclical nature of the business and economic market. The identification in this report of factors that may affect the Company’s future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Forward-looking statements speak only as of the date on which they are made. The Company undertakes no duty to update forward-looking statements, except as required by law. Readers are cautioned not to put undue reliance on forward-looking statements. The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto contained in this report.

Overview and Basis of Presentation

We conduct our operations through our wholly owned subsidiaries, BFK Franchise Company LLC (“BFK”), BFK Development Company LLC (“BFKD”), CI Franchise Company LLC (“CI”), Sew Fun Franchise Company LLC (“SEW FUN”) and SF Franchise Company, LLC (“SF”). Unless otherwise indicated, all references to the Company in this quarterly report include the operations of our wholly owned subsidiaries. We generate revenues primarily from franchise fees, royalty fees and creative center sales. We sell 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. Below is a summary of our operating entities.

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. BFK’s franchisees provide 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, 2015, BFK has sold 714 franchises, operating in 45 states within the United States, 10 Canadian provinces and 37 other countries. As of June 30, 2015, there were 33 terminated BFK franchises and 21 inactive franchises, this represents approximately 7.5% of total franchises granted over the life of the concept. Any terminated or inactive franchises can be sold in the open market. Royalty fees are collected from each franchise territory after the first 6 months of operations. On average, during the three months ended June 30, 2015, there were approximately 400 franchise owners with one to multiple territories paying royalty fees per month. The royalty fee for BKF is 7% of revenues. There is a minimum royalty fee of $1,500 for an initial territory and $750 for an additional territory per 12 week period.

On September 14, 2012, the Company formed 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 operates primarily through a mobile franchise model.  CI began selling franchises during the 2013 fiscal year. As of June 30, 2015 CI has sold 45 franchises in the United States and 3 franchises (2 individual and 1 master) in foreign countries. As of June 30, 2015 there were 7 terminated or inactive CI franchises, this represents approximately 12.7% of the total franchises granted over the life of the concept. Any terminated or inactive franchise territories can be sold in the open market. On average, during the three months ended June 30, 2015, there were approximately 40 franchise owners with one to multiple territories paying royalty fees per month. The royalty fee for CI is 7% of revenues. There is a minimum royalty fee of $1,200 for an initial territory and $500 for an additional territory per 12 week period.

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The Company has commenced the process of registering SF with state franchising regulators. SF was formed under the laws of the State of Florida on January 27, 2015. As of June 30, 2015 the Company has granted and sold 4 franchises for SF. The SF franchisee’s requirement to comply with the royalty fee agreement commences on the 3^rd month after the franchise is granted.

Recent Developments

On July 22, 2015, the Board of Directors removed Brian Pappas as Chief Executive Officer of the Company, effective immediately. Mr. Pappas continues to serve on the Board and remains an employee of the Company on paid leave. Also on July 22, 2015, the Board appointed Rod Whiton as interim Chief Executive Officer of the Company and Michelle Cote as President and Secretary of the Company, each effective immediately. The Board also elected Charles (Chuck) Grant as Chairman of the Board. On July 22, 2015, the Board also elected two additional directors, JoyAnn Kenny-Charlton, Esq. and Michael Gorin, effective immediately. For additional information concerning Mr. Whiton, Ms. Kenny-Charlton and Mr. Gorin, please see the Current Report on Form 8-K filed by the Company on July 28, 2015.

On June 3, 2015, the Company engaged a professional services firm to provide Sarbanes-Oxley consulting services. The scope of the work provides SOX compliance and internal audit services. The initial agreement started in June, 2015, and has an anticipated completion date of September, 2015.

Results of Operations

The following table represents the franchise sales activity for the three month periods and nine month periods ended June 30, 2015 and 2014:

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Franchise Fees, Royalty Fees and Creative Center Sales

The following table presents revenues from franchise fees, royalty fees and creative center sales for the three month periods and nine month periods ended June 30, 2015 and 2014:

The decline in franchise fees is primarily a result of fewer franchise sales in the United States for the comparable three month period ended June 30, 2015 of 26 franchises, and a decline in the franchise sales for the comparable nine month period ended June 30, 2015 of 61 franchises. The decline in franchise fees was also impacted by the results of an unusually high number of BFK international franchises and international master franchises sold during the first nine months of fiscal year 2014. The three and nine months ended June 30, 2014 included one and seven, respectively, additional sales of master franchise agreements as compared to the comparable 2015 periods. The master franchises fees are generally in the six-figure range and add significantly to the revenue for the respective reporting period. Furthermore, in the first half of fiscal year 2015 the Company experienced a high demand for BFK franchise territories that had already been sold (and are currently being operated by franchisees) and therefore could not sell franchises in those territories. Because of the historically high volume of franchise sales primarily in the United States the unsold territories become progressively more difficult to sell on the open market.

Royalty fees increased by approximately $210,000 in the three month period ended June 30, 2015 compared to the same period in 2014 because of an approximately 13% increase in the average number of franchises paying royalty fees. Royalty fees increased by approximately $764,000 in the nine month period ended June 30, 2015 compared to the same period in 2014 because of an approximately 37% increase in the average number of franchises paying royalty fees. The Company expects royalty fees will continue to grow with the increase in the number of franchisees.

The royalty fee for BFK is 7% of franchise revenues. There is a minimum royalty fee of $1,500 for an initial territory and $750 for an additional territory per 12 week period. For new franchises, the royalty fees do not become payable until after their initial 6 months of operations.

The royalty fee for CI is 7% of franchise revenues. There is a minimum royalty fee of $1,200 for an initial territory and $500 for an additional territory per 12 week period. For new franchises, the royalty fees do not become payable until after their initial 6 months of operations.

The royalty fee for SF is a fixed amount equal to $350 per month during the first year and increases each year during years 2 through 5, by $25 per month. For both BFK and CI, the number of franchises required to comply with the royalty fee agreements has increased and will continue to increase with the sale of additional franchises. For SF, the franchisee’s requirement to comply with the royalty fee agreement commences on the 3^rd month after the franchise is granted.

Excluded from the franchise and royalty revenues are payments made by franchisees directly to Leap Ahead Learning Company for set-up and monthly support of a franchise management tool (“FMT”). The set-up fee is $250 and the monthly support fee is $75 which amounts reflect support services provided to the franchisees pursuant to the franchise agreements. Leap Ahead Learning Company, the developer of the FMT, is wholly owned by Dan O’Donnell, who is a director and executive officer of the Company.

Operating Expenses

Total operating expenses for the three month periods ended June 30, 2015 and 2014 were approximately $1,602,000 and $1,603,000, respectively. There was a decrease in total operating expenses of approximately $1,000 or less than 1%, for the three month period ended June 30, 2015. Total operating expenses for the nine month periods ended June 30, 2015 and 2014 were approximately $4,251,000 and $4,491,000, respectively. There was a decrease in operating expenses during the nine month period ended June 30, 2015 of approximately $240,000 or 5%.

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The changes in operating expenses are explained as follows:

Commissions and Consulting Fees

The Company paid commissions and consulting fees for the three month periods ended June 30, 2015 and 2014 of approximately, $459,000 and $648,000, respectively, a decrease of approximately $189,000 or 29%. Payments for the nine month periods ended June 30, 2015 and 2014 totaled approximately $1,157,000 and $1,825,000, respectively, a decrease of approximately $668,000 or 37%. The payments for commissions and consulting fees declined primarily as a result of the reduction in the sales of new franchises during the three and nine month periods ended June 30, 2015, as compared to the same periods in 2014.

Franchise Training Payments

For the three month periods ended June 30, 2015 and 2014, the Company paid franchise training and expense fees of approximately, $117,000 and $123,000, respectively, a decrease of approximately $6,000 or 5%. Payments for the nine month period ended June 30, 2015 and 2014 were approximately $315,000 and $348,000, respectively, reflecting a decrease of approximately $33,000 or 9%. The net reduction in franchise training and expense fees is partially due to the reduction in the number of franchises sold during the three and nine month periods ended June 30, 2015, as compared to the same periods in 2014, resulting in fewer Lego kits provided to franchises and decreased field visits, partially offset by increased expenses related to a promotional t-shirt program and an increase in printed brochures and materials. These expenses also contain a fixed element related to the number of new franchises and a variable element associated with new programs distributed to active franchises.

Payroll Expense