UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File No. 333-153294
SMART KIDS GROUP, INC.
(Exact name of registrant as specified in its charter)
| Florida | 05-0554762 | |
| (State or other jurisdiction of | (I.R.S. employer | |
| incorporation or formation) | identification number) |
Suite 109, 2005 Tree Fork Lane
Longwood, FL 32750
(Address of principal executive offices)
| Issuer’s telephone number: | (780) 222-6257 |
| Issuer’s facsimile number: | N/A |
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Copies to:
The Sourlis Law Firm
Virginia K. Sourlis, Esq.
214 Broad Street
Red Bank, New Jersey 07701
(732) 530-9007
www.SourlisLaw.com
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.0001 par value per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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¨ |
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 (§ 229.405 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 ¨ No ¨ |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | ||
| Non-accelerated filer | ¨ | 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 ¨ Nox
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed fiscal quarter.
The aggregate market value of the voting common stock held by non-affiliates of the Registrant on October 12, 2010 was approximately $451,000 based upon the reported closing sale price of such shares on the Over-the-Counter Bulletin Board (OTCBB) for that date.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
As of October 14, 2010, there were 354,917,209 shares of Common Stock, $0.0001 par value per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Table of Contents
| PAGE | |||
| PART I | |||
| Item 1. | Description of Business. | 3 | |
| Item 1A. | Risk Factors | 14 | |
| Item 1B | Unresolved Staff Comments | 24 | |
| Item 2. | Description of Property. | 24 | |
| Item 3. | Legal Proceedings. | 24 | |
| Item 4. | Submission of Matters to a Vote of Security Holders. | 24 | |
| PART II | |||
| Item 5. | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities. | 25 | |
| Item 6 | Selected Financial Data | 28 | |
| Item 7. | Management’s Discussion and Analysis or Plan of Operation. | 28 | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 34 | |
| Item 8. | Financial Statements. | 34 | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | 46 | |
| Item 9AT. | Controls and Procedures. | 46 | |
| Item 9B. | Other Information. | 48 | |
| PART III | |||
| Item 10. | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act. | 48 | |
| Item 11. | Executive Compensation. | 51 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | 52 | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. | 53 | |
| Item 14. | Principal Accountant Fees and Services. | 55 | |
| Item 15. | Exhibits and Reports on Form 8-K | 57 | |
| SIGNATURES | 58 | ||
| CERTIFICATIONS | |||
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PART I
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Registrant to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Registrant’s plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Registrant. Although the Registrant believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Registrant or any other person that the objectives and plans of the Registrant will be achieved.
Item 1. Description of Business
General
Smart Kids Group, Inc. (throughout this report referred to as “we,” “us,” “the Company,” “Smart Kids Group” or “SKGP”) is a development stage corporation incorporated in the State of Florida on February 11, 2003. From inception to the present, we have not generated any revenues, and from inception to June 30, 2010, we have incurred a net loss of $2,261,473. As of June 30, 2010, we have $112 in cash on hand to fund our operations. In their report included in their audit for fiscal year ended June 30, 2010, our auditors expressed substantial doubt as to our Company’s ability to continue as a going concern.
Using intellectual property we sublicense from affiliate companies as the basis for our product lines, we develop and produce educational and entertaining media products (television shows, video, music and books) relating to the licensed Be Alert Bert® character and his friends, and the licensed Gina D Brand Library®. Our media products are intended to entertain and educate children ranging from the age of six through twelve years old with a particular focus on children’s personal safety, health and fitness and related issues. Our products are sometimes referred to in this report as “Edutainment products.” Edutainment is a genre of children’s products that serve to educate as well as entertain children.
3D Future Vision, Inc. Exclusive Licensing Agreement
Effective September 9, 2010, SKGP and 3D Future Vision, Inc., a Florida corporation ("3DFV”), entered into a License Agreement (the “License Agreement”) on an exclusive basis for a term of twenty five (25) years. Pursuant to the License Agreement, 3DFV grants certain rights under its proprietary intellectual property related to the Gina D Brand Library® inventory (“Licensed IP”) to SKGP to make, have made, import, use, offer for sale, promote, distribute, sell products and processes, and otherwise commercially exploit the Licensed IP in all fields and any manner as deemed necessary in the sole discretion of the Company.
In consideration for the execution of the License Agreement and for the exclusivity of the license, SKGP has agreed to pay a one-time fee of $263,008 to the owners of 3DFV, Mr. Joseph DiFrancesco and his spouse Bernadette, and issue an amount of shares of SKGP common stock to 3DFV equivalent to render 3DFV’s percentage of stock ownership in the Company equal to that of Mr. Richard Shergold, the Company’s President and Co-Chairman of the Board of Directors, who currently owns 156,949,209 shares (44.22%). This issuance to 3DFV will amount to approximately 156,949,209 shares of the Company’s common stock. As of October 14, 2010, 3DFV has been issued 100,000,000 shares of restricted common stock; the remaining shares of restricted common stock have yet to be issued subject to the requisite filings with the SEC to increase the number of authorized shares of common stock. In addition, 3DFV’s President, Mr. Joseph DiFrancesco, has been appointed as the SKGP’s Chief Executive Officer and Co-Chairman of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Pursuant to the License Agreement, Mr. DiFrancesco was granted the right to appoint an additional board member in his sole and absolute discretion, and he subsequently appointed Mr. Michael Gibilisco for consideration.
At the time of the pending merger, 3DFV and Richard Shergold will be issued the number restricted common shares for the amount agreed upon which is 200 million shares each in total. A change of control clause exists in the licensing agreement for SKIH, but will be amended to be an even split between SKGP and 3DFV.
There are no material relationships between the Company or its affiliates and any of the parties to the License Agreement, other than with respect to the License Agreement.
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The exclusive license gives SKGP exclusive worldwide rights to the Gina D Brand Library® and creates a working partnership with 3D Future Vision in an effort to create a revenue stream by marketing and selling DVD's, CD's, toys, and other ancillary products derived from the Gina D Brand Library® of television programs, valued at $7,500,000. In addition, the license allows SKGP to sell 2D to 3D conversions of content and sell 3D digital displays to generate advertising revenues.
Provided that all monetary terms and conditions of the Licensing Agreement, the Addendums and Amendments to the Licensing Agreement are met, the license shall remain in force. Should there be a breach in the Agreement, or if SKGP fails to remain on the OTCBB, the License will terminate. This should be considered a material risk to investing in our Company, as failure to maintain the licensing agreement could potentially have a devastating effect on our ability to continue operations.
The Gina D Brand Library® television programs can be seen worldwide over 30 times a week on major Christian cable and broadcast television networks including: the Trinity Broadcasting Network (TBN), the Smile of a Child 24/7 Network, the Christian Television Network (CTN), the World Harvest-LeSea Network (WHT), the Victory Television Network (VTN), the AMGTV Network, and the TCT Television Network through the following broadcast stations, DIRECTV, Dish Network, Sky Angel, Comcast, Brighthouse Network and a number of other Christian and Family cable networks and Broadcast Stations. The programs can be seen in the following geographic territories: United States, Europe, Middle East, Australia, New Zealand, S.E. Asia, Africa, Russia and on Canada's own Miracle Channel.
To capitalize on all of the current television exposure, SKGP plans to raise money to distribute and promote “Sing Along with Gina D & Bert The Bee” a pre-school family Television Special, DVD’s and CD’s to be sold domestically and internationally narrated in English by American “Radio Icon” Casey Kasem and in Spanish. SKGP will also manufacture and distribute all the “Gina D Brand Library® products consisting of 57 DVD’s and over 340 Original Song CD’s & Music Videos which are all owned by 3DFV and licensed to the Company. SKGP plans on distributing the Gina D Brand Library® products through large retail outlets and large books stores. Additionally these products are anticipated to be sold over the Internet by online retailers. To accomplish this, the Company will need to raise substantial additional financing. As of the date of this report, no such contractual arrangements have been made to distribute the Company’s products as described above, and no such financing has been attained.
Richard Shergold Exclusive Licensing Agreement
All intellectual property relating to Be Alert Bert® including the trademarks and work product that the Company currently works with are under an exclusive sublicense agreement with Smart Kids International Holdings, Inc., (“SKIH”) which leases all of the intellectual property relating to Be Alert Bert® from Mr. Shergold, the Company’s President, Chief Creative Officer and Co-Chairman of the Board. This sublicense agreement has been effective since June 20, 2005, at an annual fee of $60,000. Effective January 1, 2010, this licensing agreement was the subject of the Board of Directors’ resolution to no longer accrue licensing fees for this agreement until further notice. On June 25, 2010, 18,421,000 restricted common shares were issued in exchange for the outstanding and accrued licensing fees as of December 31, 2009 in the amount $184,211 at a per share price of $0.01.
The term of the sublicense agreement is 25 years. We also have the option to extend the sublicense agreement in perpetuity. The royalty fee under the sublicense agreement is $5,000 per month. SKIH has the right to terminate, if not otherwise cured within 45 days after notice, the sublicense agreement in the event we become insolvent, file bankruptcy proceedings either voluntary or involuntary, abandon the sublicense, assign the sublicense without SKIH’s written consent, fail to observe or perform any of our obligations under the sublicense agreement, or if there is a change of control of our Company. Upon the expiration or termination of the sublicense agreement, we have the right to sell any licensed products on hand as of the expiration date or termination of the sublicense agreement subject to the payment of royalties to SKIH, if applicable.
The sublicense allows us to use the trademarks, domain names and copyrights, concepts and characters in connection with the manufacture, distribution, sale, global advertisement, and otherwise ability to profit from the products relating to such Be Alert Bert® intellectual property. Our sublicense also permits us to create new stories and products utilizing the sublicensed intellectual property and to license and otherwise profit from those newly created stories and products. All newly created stories and products generated from the sublicensed intellectual property will be owned by us, without any additional payment owed to SKIH aside from the monthly royalty fee.
The licensed intellectual property relating to Be Alert Bert® television series consist of 31 episodes featuring “Bert the Bee” and are available in both English and Spanish. We intend to generate revenue from this series through licensing contracts with TV stations and through sales to the public through our planned “Smart Kids Community” website discussed below. There are currently no residual revenues being generated by the television series because the licensing fees were paid up front on a one-time, flat-fee basis, and the contract term is still active. Upon expiration of the existing terms pursuant to our outstanding licensing agreements with TV stations, we will attempt to renegotiate renewal agreements upon similar terms or through bartering for advertisement TV time. License renewals are expected to commence towards the end of 2010.
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Pursuant to our sublicense, we sublicense the Be Alert Bert® television series that is copyrighted and owned by Richard Shergold, and exclusively sublicensed, through SKIH, to our Company. The series consist of 31 episodes featuring “Bert the Bee” and music, and these episodes are available in both English and Spanish. Our Company intends to generate revenue from the Be Alert Bert® series through licensing contracts to TV stations and sales to the public via e-commerce sales from our upcoming website discussed below. There are currently no residual revenues being generated by this television series because the licensing fees were paid up front on a one-time, flat-fee basis, and the contract term is still active. Upon expiration of the existing terms pursuant to our outstanding licensing agreements with TV stations, we will attempt to renegotiate renewal agreements upon similar terms. License renewal negotiations are currently underway. The Company anticipates that any renewed licenses will be for a one-time fee. The Company does not yet know what such renewal fees will be and will depend on various factors, including competition and licensees’ economic budgets. Furthermore, there is no guarantee that the Company will be able to negotiate any renewal, and if such renewals are attained, there are no guarantees that such renewals will be on favorable terms to the Company. In addition to negotiating for licensing fees with TV stations for the TV series, our Company also plans to exchange (barter) placement of our Be Alert Bert® TV series with networks and local stations that do not choose to license the Be Alert Bert TV Series for a fee, in exchange for commercial air time in which we will run ads to attract visitors to our website. Richard Shergold has extensive experience with the barter process which is a common practice in the TV industry. The Company’s commercials, yet to be developed (currently planned at 4), will be produced from existing Be Alert Bert® TV series footage. They will be developed and edited by Richard Shergold. The commercials will then be provided to our future sales team to use in their licensing sales meetings with TV stations/outlets.
Be Alert Bert®:
We currently sublicense the following from SKIH pursuant to the Sublicense Agreement discussed above. All copyrighted and trademarked items are owned by Richard Shergold, our Chief Development Officer and Chairman, and are registered with the United States Copyright Office and United States Patent and Trademark Office in the United States and in similar governing agencies in Canada. Domain names are registered with ICANN which is the International registrar and are owned by Mr. Shergold and sublicensed to us through SKIH.
Copyrighted Characters:
| o | Be Alert Bert, a Bee (Main Character) |
| o | Freddie the Firefly, a Firefly |
| o | Be Aware Clare, a Bee |
| o | Uncle Buzz, a Bee |
| o | Betty Blue, a Butterfly |
| o | Daisy, a Flower |
| o | Otis Notice, an owl |
Copyrighted Television Series:
The “Be Alert Bert” television series is copyrighted and owned by Richard Shergold, and sublicensed, through SKIH, to our Company exclusively. The series consist of 31 episodes featuring “Bert the Bee” and music, and these episodes are available in both English and Spanish. Our Company intends to generate revenue from these series through licensed sales to TV stations and sales to the public via e-commerce sales from our upcoming Smart Kids Community website. There are currently no revenues being generated by this television series because the licensing revenue was paid up front and the contract term is still active. License renewals are expected to begin in mid-2009. Furthermore, there is no guarantee that the Company will be able to negotiate any renewal, and if such renewals are attained, there are no guarantees that such renewals will be on favorable terms to the Company.
| 1. | Be Alert Bert |
| 2. | I’m Lost – What to Do When You Get Lost |
| 3. | Bee People Smart |
| 4. | Bee Thankful – A Special Episode |
| 5. | BaBee – Babysitting Safety |
| 6. | A Doggone Day – Animal Safety |
| 7. | Watered Down – Bathtub/Shower Safety |
| 8. | Fire, Fire – Fire Safety |
| 9. | A Toy Bee – Putting Toys Away |
| 10. | A Bee Thankful Day – The Pilot |
| 11. | A Bee Stranger Day |
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| 12. | Don’t Bee Afraid – A Light Out Safety |
| 13. | Bee Healthy Day –Dr.’s eating, etc. |
| 14. | Bee Degrees – Hot Weather Safety |
| 15. | Owl Through the Nite – Night Safety |
| 16. | Hai-Ya! – Self Defense |
| 17. | That’s Knife — Using Knives |
| 18. | I’ve Got the Vapors – Toxic! |
| 19. | A Bee Cycle Built for Two – Bike Safety |
| 20. | A Bee Tempted Day – Peer Pressure |
| 21. | An Electrical Buzz – Electrical Safety |
| 22. | Scout Us Out – Camping Safety |
| 23. | X Marks the Spot – Safety Signs |
| 24. | Play it Safe – Playground Safety |
| 25. | Safety Can Be Fun – Roller Blading, etc. |
| 26. | A Bee Aware Day – Poison Safety |
| 27. | Bee Cool Day – Cold Weather Safety |
| 28. | Listen Up – Not Listening to Your Parents |
| 29. | Beefoot in the Park – Footwear Safety |
| 30. | The Adventures of Be Alert Bert & Be Aware Clare – Episodes |
| 31. | The Healing Hand |
Copyrighted Be Alert Bert’s Theme Songs:
| 1. | Episode 1 – The Shiver Song & The Turning Blue Blues |
| 2. | Episode 2 – Be People Smart |
| 3. | Episode 3 – Betty’s Lament |
| 4. | Episode 4 – The Bathroom Scare |
| 5. | Episode 5 – I Can Dance |
| 6. | Episode 6 – Fire Fire |
| 7. | Episode 7 – Poison! |
| 8. | Episode 8 – Wear the Gear |
| 9. | Episode 9 – Play It Safe |
| 10. | Episode 10 – X-Flies Theme Song & The Signs Are Out There |
| 11. | Episode 11 – Babee Brother |
| 12. | Episode 12 – The Camping Song |
| 13. | Episode 13 – Naming the Dog |
| 14. | Episode 14 – Be Alert Bert Old Theme |
| 15. | Episode 15 – E-Electricity |
| 16. | Episode 16 – Peer Pressure |
| 17. | Episode 17 – Protection |
| 18. | Episode 18 – What You Can’t See |
| 19. | Episode 19 – That’s Knife |
| 20. | Episode 20 – Bee Hive Kung –Fu Fighter |
| 21. | Episode 21 – Owl On the Prowl |
| 22. | Episode 22 – I’m Proud of Bee-School |
| 23. | Episode 23 – Health |
| 24. | Episode 24 – When The Lights Go Out |
| 25. | Episode 25 – Beefoot in the Park |
| 26. | Episode 26 – Listen Up |
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Copyrighted Be Alert Bert CD Theme Songs:
| 1. | Protection |
| 2. | Fire, Fire |
| 3. | Look Both Ways |
| 4. | Safety |
| 5. | Password |
Character Based Merchandise:
All character images used in pictures, merchandise, etc., are used to produce merchandise under the sublicense with the Company. The merchandise assets have been developed and manufactured and are owned by the Company and intended to be available for sale once planned e-commerce capability is operational. The Be Alert Bert TV series and the associated characters were developed several years ago by our Chief Development Officer and Founder, Mr. Shergold. At that time, he completed development and commenced production of the following Character Based Merchandise:
| o | Bert the Bee Dolls |
| o | Bert the Bee Watches |
| o | Bert the Bee Storybooks |
| o | Logoed Nightlights |
| o | Logoed Bike Helmets |
| o | Logoed Back Packs |
| o | Logoed Lunch Boxes |
| o | Logoed Medical Kits |
The Company plans to bid out new production in the first quarter of 2010 to provide sufficient inventory to satisfy our planned e-commerce demand. The bid out process will be to solicit competitive bids for manufacture and delivery of the current list of character based merchandise from 3-5 potential manufacturing vendors. The Company will then consider the bids and select a vendor based on elements such as business record, product quality, price and delivery speed. There are no existing contracts for production of additional inventory or new merchandise at this time, and no manufacturers have been identified to date.
Other Licensed Intellectual Property:
| · | 31 Song Titles |
| · | 6 CD Titles |
| · | 21 Internet Domain Names (these reserved website domains are not developed and we have no current or anticipated future uses for the domains) |
A complete list of our sublicense Song Titles, CD Titles and Internet Domain Names are listed in the “Description of Our Business” section in this Report.
We intend to register any additional characters and products in the United States and Canada and any such copyrights and trademarks covering such characters and products will be owned by us and not included in the Sublicense Agreement with SKIH.
Trademarked Material:
| 1. | Be Alert Bert |
| 2. | Be Aware Clare & Design |
Internet Domain Names planned for use:
| 1. | Smartkidsgroup.com – in use as the corporate website |
| 2. | Liveatthehive.com – planned for development as the kids community site |
Registered Internet Domain Names for potential future use: (None of these domain names are currently developed, in use or projected for any particular use).
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We currently have 21 other domain names directly relating to our Intellectual Property reserved for future use and expansion of our web services. These domain names expire at various dates in 2010 and one in 2011.
Registered Intellectual Property
All copyrighted items owned by Mr. Shergold are registered in the United States and with similar governing agencies in Canada.
Mr. Shergold owns and has Trademarked Be Alert Bert™ with the United States Patent and Trademark Office.
Mr. Shergold owns and has Trademarked Be Aware Clare™ with the Canadian Patent and Trademark Office.
Our Business Plan
We plan to use our licensed children-oriented characters, Be Alert Bert® and Gina D Brand Library® and products as a common theme to develop our main children’s website, “Smart Kids Community”, which we intend to launch in the First Quarter of 2011 contingent upon our ability to obtain sufficient financing. We anticipate obtaining such financing through the sales of our equity securities, however no offerings of our securities have been planned to date. The Company anticipates charging an annual membership fee (after a 30 day trial period) which will provide customers with access to some of our content, and we intend to offer for sale our current line of videos, music, books and other Intellectual Property content that we sublicense, as well as new content and merchandise we intend to develop and own. The website membership fee is anticipated to be $19.99 per family/per year. Revenue from this source is intended to provide short term operating funds for the company. We anticipate that we will require approximately US $2,000,000 to complete, launch and properly market this website for the website to reach its anticipated potential. Obstacles to successful revenue generation which may prevent us from achieving our goals include lack of sufficient funding to build the planned website, general lack of discretionary spending by parents due to global economic difficulties and rejection of the benefits of the site by the target demographic.
All “Smart Kids Community” website features and functions represented in this report are planned and not developed. The Company has completed the plans by documenting our functional requirements for the site in a typewritten list and reviewed them with two potential website development companies for them to assess efficacy. The site has been planned with functional requirements completed by our management team in preparation for development and launch, which is contingent upon financing. It is the Company’s intention to obtain the necessary financing for completing and launching the “Smart Kids Community” website through the sale of equity securities in the near future. Functional requirements include identification and documentation of key site technology components. Similar to an architect’s plans for constructing buildings, functional requirements are the components desired in the construction of a website. Management has considered what capabilities they plan to implement in the website (e.g. downloading videos or sending an e-mail) and have incorporated their decisions into a plan which was communicated to a website developer in the form of “key site technology components”. Representative components are:
| · | Access and Security requirements |
| o | Including child usage tracking and parental reporting |
| o | Access prevention to block Denial of Service attacks which are malicious actions taken by hackers sending a high volume of messages to your website that overwhelm your website’s capacity, thereby preventing access by anyone legitimately trying to use the website. We plan to utilize software technology that only allows registered (legitimate) users to access the site |
| o | Mobile access |
| o | Etc. |
| · | Data base requirements |
| o | Includes multiple databases for communications and control |
| o | Data mining which is designing a database of users to facilitate access to sort the information by category (e.g. all registered users from Kansas). The resultant answer has been selected (‘mined’) from the total database. |
| o | Data base management |
| o | Etc. |
| · | E-Commerce requirements |
| o | Multi-currency |
| o | Inventory management/tracking |
| o | Distribution |
After discussing our planned functional requirements, these website development companies agree that our desired functionality and statement of requirements can be accomplished with existing website development tools. The Company will not develop the website internally, but will contract with an outside vendor to build the website. The Company has not entered into an agreement with a website development company to complete the website at this time.
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The growth and development of our business will require a significant amount of additional working capital. We currently have limited to zero financial resources and based on our current operating plan, we will need to raise additional capital in order to continue as a going concern. We currently do not have adequate cash to meet our short or long term objectives. In the event additional capital is raised, it will have an extreme dilutive effect on our existing stockholders. Upon the obtainment of additional funds, we also plan to develop a character based children’s TV series for release in 2010 entitled “The Adventures of Bert and Claire”. We anticipate that we will require approximately $9 million to complete and launch and market this new TV Series.
Quality Control
The Company will have complete control and approval of any and all content it delivers to the public and particularly on its website. The Company plans to assemble a Board of Advisors from related content fields (such as teachers, counselors and parents) and as well as staff professionals from appropriate disciplines. The Company plans to initially invite a group of six (two teachers of 6-12 year olds; two parents of 6-12 year olds and two school counselors of 6-12 year olds) to serve on the Board of Advisors on a voluntary basis for no compensation other than a set of DVD’s produced from the Be Alert Bert® and Gina D Brand Library® TV series. The initial Board of Advisors will be requested to advise the Company on their recommended composition of a permanent Advisory Board and the specific skill sets the company should consider when hiring permanent professional staff. We anticipate that we will be required to compensate the permanent Advisory Board, however no such compensation arrangements have been planned to date.
It is intended that such advisors will be compensated in the form of cash, equity, equity options, or some mix of the aforementioned. As mentioned however, no such plans have been formalized by the Company. Our Board of Directors will hold a meeting to discuss this Advisory Board’s compensation immediately prior to the permanent Advisory Board’s formation in the future.
The Company has no specific plans in place regarding the types of professional skills it will acquire for staff at this time and will utilize the advice proffered by the initial Advisory Board to make those decisions. Our quality control process is predicated on a policy that requires all content to be reviewed and approved first by our staff, and finally to be reviewed and approved by Richard Shergold, our Chief Development Officer.
To date, no such Board of Advisors has been assembled by the Company. We anticipate that our quality control procedures will be in full effect to coincide with the launching of our website to ensure that all displayed content is age appropriate and safe for children’s viewing.
Strategic Business Plan
Generating Revenue and Financing Plans for the Short-Term
In the short term, the Company plans to generate revenues and operating capital with three initiatives:
| · | The sale of equity securities. |
| · | The licensing/re-licensing of the existing Be Alert Bert® and Gina D Brand Library® TV series to stations worldwide. The expected revenue from this initiative will not be significant. |
| · | Receipt of annual Smart Kids Community website membership fees ($19.99 per family). The expected revenue from this initiative will not be significant in the first several months of operation. |
We intend to conduct financing and raise operating capital for our intended plans of operations through the sales and issuances of our common stock. While no definitive arrangements have been made with respect to such financing, we intend to conduct a series of private offerings to accredited investors only (as such term is defined in Rule 501 of Regulation D of the Securities Act of 1933) either through our officers or directors, or through the help of one or more placement agents. To date, no such placements agents have been identified, nor have any financing sources.
Obtaining short term operating capital through sales of our equity securities is vital for us to continue as a going concern. Should we fail in our efforts to attract investment in our Company, we will not be able to execute our business plan, and our operations will fail. Current obstacles we face to our financing plans include, but are not limited to, the current global economic crises and declining market for investment in the United States, the highly competitive market in which we operate, the lack of popularity and brand awareness of our products, the fact that we have never generated revenues and our products are not market tested, the large amount of debt we have incurred since inception, and the fact that our auditors have issued a going concern opinion in our last audited financial statements and we anticipate that they will be issuing a going concern opinion in our upcoming audited financial statements. These factors, along with many others (See Risk Factors section) will render it completely difficult for us to attain financing in the near future.
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Assuming sufficient capital funding as described above, the Company’s operational plans are based on a planned two stage growth strategy:
| · | Phase 1 – Renew and Increase Licenses for the Existing Be Alert Bert® and Gina D Brand Library® Series by the year ended June 30, 2011 |
| o | The Be Alert Bert TV series was created in 1991 by SKIH and is included in the Company’s sublicense with SKIH and is currently broadcasted on eleven stations in South America and Europe. SHIH owns the copyrights and the Company owns the TV series assets, The Company however is not currently receiving any revenue for such broadcastings as the revenue from the existing licensing was paid at the time of initial contracting on a one-time basis. This practice is standard in the industry and the Company does not foresee changes to this payment practice. |
| o | All existing licenses are currently up for renewal and the Company has contacted the current licensees and has received verbal commitment that the licenses will be renewed. No renewals are currently contracted. |
| o | The Company intends to sell new Licenses initially throughout America and South America. However, no actions have taken place to date. |
| o | While the Company plans to receive licensing revenue for such future broadcasts, such licensing is not anticipated to generate a substantial amount of revenue for the Company. |
| o | The primary purpose of the Phase 1 licensing activities is to develop brand awareness and drive viewers to the Company’s community website for kids. |
| o | This licensing effort is an ongoing sales process by independent contractors with an estimated cost of $10,000 per month cost. It will begin at funding and continue for an initial projected timeframe of two years. |
| · | Phase 2 – Develop and Launch ‘Smart Kids Community,” a Community website for Kids |
| o | All “Smart Kids Community” website features and functions represented in this filing are planned and not developed. The site has been planned with functional requirements completed by our management team in preparation for development and launch, which is contingent upon financing. It is our intention to obtain the necessary financing for completing and launching the “Smart Kids Community” website through the sale of equity securities in the near future. Functional requirements include identification and documentation of key site technology components. Similar to an architect’s plans for constructing buildings, functional requirements are the components desired in the construction of a website |
| o | “Smart Kids Community” is planned to be a 3D animated membership website based on Be Alert Bert® and Gina D Brand Library® and other characters and is planned to be the Company’s primary revenue producer. Please note that all website features and functions discussed in this section with respect to “Smart Kids Community” are planned and have not been developed. Although in perpetual development, once launched, the “Smart Kids Community” membership website is anticipated to generate sign-up revenue immediately upon release. The rate of membership sign-ups may also be slow in the first months because of the optional 30 day trial period and the time it could take for our Internet marketing initiatives to take effect. We believe that the primary catalyst for website visits and memberships will be the “re-release” of our TV series Be Alert Bert® and Gina D Brand Library® at the completion of Phase 1. While we anticipate that we will gain website membership revenues upon the website’s launch, we face many obstacles for attaining revenues, included but not limited to the fact that our marketing initiatives are not in place, and we have relatively no brand recognition to date. |
| o | The membership fee is anticipated to be $19.99 per family/per year. Revenue from this source will provide short term operating funds for the company. |
| o | The site is planned to contain the following major features: |
| § | Utilizing the Be Alert Bert® and Gina D Brand Library® licenses, the website will have sections dedicated to health, safety, education and fitness that we intend to be sponsored by corporations. For example, we will attempt to locate sponsorships for the fitness section by a sporting equipment manufacturer or retailer. Currently, the Company has no contracts or agreements with any corporate sponsor, nor have any sponsors been contacted in these respects. |
| § | Sponsoring corporations will pay an annual fee for the branding rights to their sections. This fee structure is currently under development and we anticipate such fees will be subject to negotiation. The company will have complete control and approval of any and all content on its site. Sponsoring corporations are anticipated to pay an annual fee for the branding rights to their sections. Branding rights will include a sponsor identification banner (e.g. “This section of the website is sponsored by XXXX”) which will appear at the top right corner of the display as long as the visitor is within the sponsor’s area of the site. This is similar to major corporations sponsoring athletic stadiums; they will benefit by association with a company dedicated to helping kids. All site content will be Company produced. There will be no ‘sponsor developed’ content and only their name/logo will appear on their sponsored section. The sponsor will review and approve company content that is displayed in their sponsored section; for example if a major retailer such as Target sponsored the safety section of the site, the content would be several TV shows showcasing safety such as: ‘Don’t get in a Car with a Stranger, etc. No Target products or commercials would be displayed. |
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| § | The Company plans to assemble a Board of Advisors from related content fields (such as teachers, counselors and parents) and as well as staff professionals from appropriate disciplines to review and approve all content planned by sponsors for the site. Our quality control process is predicated on a policy that requires all content to be reviewed and approved first by our staff, and finally to be reviewed and approved by Richard Shergold, our President and Co-Chairman of the Board. To date, no such Board of Advisors has been assembled by the Company. We anticipate that our quality control procedures will be in full effect to coincide with the sponsorships we host on the website to ensure that all displayed content is age appropriate and safe for children’s viewing. |
| § | “Smart Kids Community” is planned to have sections for members to visit for character based games, video clips and other Edutainment content. |
| § | The site is planned to have a secure social networking component, such as offered by Facebook for its members; however it is planned to have strict parental control features including monthly reporting to parents of site activity. |
| § | E-commerce functionality is planned on the site to facilitate purchase of digital media and character based merchandise. The amount of revenue projected to be gained from e-commerce sales from our Smart Kids Community website is not anticipated to be significant until 2Q 2011 Our Company’s management has made assumptions, based upon their years of collective experience that brand recognition and membership levels will not be sufficient to support significant merchandise sales from our website until 2Q11. This is just an approximation. The Company will begin to offer some Be Alert Bert® and Gina D Brand Library® character based merchandise for sale in 1Q2011, and the Company will develop and produce additional merchandise items in 1Q11 to prepare for offering what will become its full line of character based merchandise to be launched in 2Q11. |
All “Smart Kids Community” website features and functions represented in this filing are planned and not developed. The Company has completed the plans by documenting our functional requirements for the site and reviewed them with two potential website development companies for them to assess efficacy. These website development companies agree that our desired functionality and statement of requirements can be accomplished with our existing website development tools.
SUMMARY OF PRODUCT DEVELOPMENT
(Fiscal Year Ends June 30th)
For over four years we have developed and refined our business plan through internal meetings and external discussions with consultants and representative vendors. We have made numerous preliminary, but non-contractual vendor contacts in all areas of its business to ensure rapid deployment of our operational strategy; because execution of the plan is dependent on raising sufficient capital for successful implementation. We plan to raise capital primarily through the public equity markets,
The Company has also interviewed potential staff, but has made no hiring offers. We have secured an office location, and have entered into a license agreement which includes physical office space. We have interviewed representative vendors in the manufacturing, franchising, web development, TV series production and have made no contractual agreements and in addition have made other similar contacts with marketing and sales resources for potential future use.
The following is described against a timeline that is not date specific:
The Company’s specific steps to become operational and generate revenues are as follows (all times are completion times from anticipated effectiveness of our Report):
| Step | Time* | Cost | Funding Source | ||||||||
| Initialize operations | 1 month | $ | 100.000 | Equity Funding | |||||||
| Update TV series | 1 month | $ | 50,000 | Equity Funding | |||||||
| Produce commercials | 1 month | $ | 25,000 | Equity Funding | |||||||
| Launch initial kids website | 2 months | $ | 500,000 | Equity Funding | |||||||
| Renew/Sell new TV licenses | 2-6 months | $ | 60,000 | Equity Funding | |||||||
| Receive membership revenue | 4 months | $ | 0.00 | Membership sales | |||||||
| Receive licensing revenue | 4 months | $ | 0.00 | License sales | |||||||
| Cash flow positive | 5 months | $ | 0.00 | N/A | Cash flow positive | ||||||
Develop 2nd TV series | 18 months | $ | 9,000,000 | Equity Funding | Cash flow positive | ||||||
| Build out Kids website | 4 months | $ | 500,000 | Equity Funding | Cash flow positive | ||||||
| Operational growth | 6 months | $ | 1,500,000 | Equity Funding | Cash flow positive | ||||||
| Ongoing stable operations | 12 months | $ | 0.00 | N/A | Cash flow positive | ||||||
| Manufacture Character Merchandise | 6-12 months | $ | 1,000,000 | Equity Funding | Cash flow positive | ||||||
| Franchise Kiosks | 24 Months | $ | 300,000 estimated | Operations Funded | Cash flow positive | ||||||
| Franchise Stores | 36 Months | $ | 500,000 estimated | Operations Funded | Cash flow positive | ||||||
* All projected times in this table are subject to change.
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Produce Commercials
We plan to exchange (barter) placement of our Be Alert Bert® and Gina D Brand Library® TV series with networks and local stations that do not choose to license the Be Alert Bert® and Gina D Brand Library® TV Series; for commercial time in which we will run ads to attract visitors to our website. Richard Shergold has extensive experience with the barter process because it is a common practice in the TV industry. The Company’s commercials (currently planned at 4) will be produced from existing Be Alert Bert® and Gina D Brand Library® TV series footage. They will be developed and edited by Richard Shergold. The commercials will then be provided to our future sales team to use in their licensing sales meetings with TV stations/outlets.
Character based Merchandise
The Company plans to bid out new production in 3Q11to provide sufficient inventory to satisfy our planned e-commerce demand. The bid out process will be to solicit competitive bids for manufacture and delivery of the current list of character based merchandise from 3-5 potential manufacturing vendors. The company will then consider the bids and select a vendor based on elements such as business record, product quality, price and delivery speed. There are no existing contracts for production of additional inventory or new merchandise at this time, and no manufacturers have been identified to date. This initial character based merchandise is for e-commerce sale from our Smart Kids Community website.
Kiosks and Stores (Strategic Plans for 2012 and 2013)
The Company has strategic plans (forecasted for 2011) to be implemented after appropriate (management believes 24 months will be appropriate) time has elapsed from the Smart Kids Community website launch for the market to have sufficient brand recognition of Be Alert Bert® and Gina D Brand Library® family of characters; to franchise mall based kiosks to sell character based merchandise in a direct retail manner. In addition, the Company has strategic plans (forecasted for 2013) to franchise retail stores to sell character based merchandise in a direct retail manner. Existing character based merchandise exists in small amounts as noted, and potential new character based merchandise has been planned, but no contracts for additional manufacture have been made to date. Implementation of these strategies will require contracting for additional character based merchandise inventory.
Launch Initial kids Website/Build out Kids Website
Smart Kids Community is our community website and it will be launched within 2 months of necessary funding. The company has plans to add additional features to the site, over time, to enhance the freshness and value of the site. We look at this as site improvement which will be an ongoing process. It is our plan to start the addition (Build out) of additional features to the site four months after funding. The Build Out process will continue indefinitely as new technology becomes available and our members request new features.
Corporate Sponsorship
Our Company’s plan to attain sponsorships from major corporate entities is through contact and discussions by our management. There will be no employees (other than the executive team) or independent contractors involved in sales to corporate sponsors. We believe that our core strategy in this respect is to pitch our products’ central theme to potential sponsors, which provides appeal by allowing them to support a cause aimed to improve the health, education and safety of our children. We believe that many corporations will want to be associated with our Company’s general mission.
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Sponsoring corporations will pay an annual fee for the branding rights to their sections. This fee structure is currently under development and we anticipate such fees will be subject to negotiation. The Company will have complete control and approval of any and all content on its site. Sponsoring corporations are anticipated to pay an annual fee for the branding rights to their sections. Branding rights will include a sponsor identification banner (e.g. “This section of the website is sponsored by XXXX”) which will appear at the top right-corner of the display as long as the visitor is within the sponsor’s area of the site. This is similar to major corporations sponsoring athletic stadiums; they will benefit by association with a company dedicated to helping kids. All site content will be Company produced. There will be no ‘sponsor developed’ content and only their name/logo will appear on their sponsored section. The sponsor will review and approve company content that is displayed in their sponsored section.
Profitability
We do not expect to become profitable for a minimum of 12-24 months from the date of this report. Our management is of the opinion that we immediately require $12 million dollars to carry out our business plan and operational strategies, and even if we obtain such financing, there is still no assurance that we will become profitable. As of the date of this report, we have not identified any sources for financing.
Status of any publicly announced new Product or Service
Effective September 9, 2010, SKGP and 3D Future Vision, Inc., a Florida corporation ("3DFV”), entered into a License Agreement (the “License Agreement”) on an exclusive basis for a term of twenty five (25) years. Pursuant to the License Agreement, 3DFV grants certain rights under its proprietary intellectual property related to the Gina D Brand Library® intellectual property inventory (“Licensed IP”) to SKGP to make, have made, import, use, offer for sale, promote, distribute, sell products and processes, and otherwise commercially exploit the Licensed IP in all fields and any manner as deemed necessary in the sole discretion of the Company.
In consideration for the execution of the License Agreement and for the exclusivity of the license, SKGP has agreed to pay a one-time fee of $263,008 to the owners of 3DFV, Mr. Joseph DiFrancesco and his spouse Bernadette, and issue an amount of shares of SKGP common stock to 3DFV equivalent to render 3DFV’s percentage of stock ownership in the Company equal to that of Mr. Richard Shergold, the Company’s President and Chairman, who currently owns 156,949,209 shares (44.22%). This issuance to 3DFV will amount to approximately 156,949,209 shares of the Company’s common stock. In addition, 3DFV’s President, Mr. Joseph DiFrancesco, has been appointed as the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Pursuant to the License Agreement, Mr. DiFrancesco has also been granted the right to appoint an additional board member in his sole and absolute discretion.
Competitive business conditions, the Issuer's competitive position in the industry, and methods of competition
There are also many independent product development firms with which the Company competes. Many of these companies have substantially greater resources than the Company and represent properties which have been commercially successful for longer periods than the Properties represented by the Company. The Company believes it would be relatively easy for a potential competitor to enter its market in light of the relatively small investment required to commence operations as a merchandising agent.
Sources and Availability of raw materials and the names of principal suppliers
Our products do not require the consumption of raw materials.
Dependence on one or a few customers
We plan to market our products through distribution networks that aim to reach a vast internet and TV audience nationwide. We do not anticipate that we will depend on one or few customers.
Seasonality
We do not believe the television series is seasonal. However, we do believe that in the future when we begin merchandise sales it will increase during the holiday season when gifts are traditionally given to children.
Government Approval
There are currently no regulations governing our products or services.
Employees
Aside from the Officers and Directors as described in this report, the Company currently does not have any other employees.
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Organizational History
We were incorporated under the laws of the State of Florida on February 11, 2003. Since our inception, we have developed and licensed children’s EDUtainment products through a variety of media including television, video, retail, direct marketing, and the Internet.
Executive Offices and Telephone Number
Our principal executive offices are located at Suite 109, 2005 Tree Fork Lane, Longwood, FL 32750, and our telephone number is (780) 222-6257.
Office Rent
We share office space at the residence of the Chairman of the Board and Chief Development Officer located in Edmonton, Canada at no cost. In addition, we share office space at the residence of the Chief Executive Officer of the Company in Longwood, Florida at no cost. We currently have no need to purchase or rent commercial office space.
For the years ended June 30, 2010 and 2009, the rent expense was zero.
Item 1A. Risk Factors
RISKS ASSOCIATED WITH OUR BUSINESS
In addition to the other information in this report, the following risks should be considered carefully in evaluating our business and prospects:
Risks Relating To Our Company
We are a development stage company and have history of losses since our inception. If we cannot reverse our losses, we will have to discontinue operations.
From our inception in February 2003, we have not generated any revenues. As of June 30, 2010, we had $112 in cash on hand, total assets of $407,291, total liabilities of $650,739 and a stockholders’ deficit of $243,448. In our auditor’s report for fiscal year ended June 30, 2009 and 2010, they expressed substantial doubt as to our ability to continue as a going concern. We anticipate incurring losses in the foreseeable future. We do not have an established source of revenue sufficient to cover our operating costs. Our ability to continue as a going concern is dependent upon our ability to successfully compete, operate profitably and/or raise additional capital through other means. If we are unable to reverse our losses, we will have to discontinue operations.
We do not own any Intellectual Property
We do not own any intellectual property. Our licensed intellectual property pertaining to Be Alert Bert® is owned by Richard Shergold, our Chief Creative Officer and Chairman, and our licensed intellectual property pertaining to the Gina D Brand Library® is owned by 3D Future Vision, Inc., a Florida corporation.
Mr. Shergold licenses the Be Alert Bert® intellectual property to Smart Kids International Holdings, Inc. (“SKIH”), a company wholly-owned by Mr. Shergold, which in turn sublicenses it to us under an exclusive sublicense agreement. The term of the sublicense agreement is 25 years and commenced on June 20, 2005. We also have the option to extend the sublicense agreement in perpetuity. The royalty fee under the sublicense agreement is $5,000 per month. SKIH has the right to terminate, if not otherwise cured within 45 days after notice, the sublicense agreement in the event we become insolvent, file bankruptcy proceedings either voluntary or involuntary, abandon the sublicense, assign the sublicense without SKIH’s written consent, fail to observe or perform any of our obligations under the sublicense agreement, or if there is a change of control of our Company. Upon the expiration or termination of the sublicense agreement, we have the right to sell any licensed products on hand as of the expiration date or termination of the sublicense agreement subject to the payment of royalties to SKIH, if applicable.
Effective September 9, 2010, SKGP and 3D Future Vision, Inc., a Florida corporation ("3DFV”), entered into a License Agreement (the “License Agreement”) on an exclusive basis for a term of twenty five (25) years. Pursuant to the License Agreement, 3DFV grants certain rights under its proprietary intellectual property related to the Gina D Brand Library® intellectual property inventory (“Licensed IP”) to SKGP to make, have made, import, use, offer for sale, promote, distribute, sell products and processes, and otherwise commercially exploit the Licensed IP in all fields and any manner as deemed necessary in the sole discretion of the Company.
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In consideration for the execution of the License Agreement and for the exclusivity of the license, SKGP has agreed to pay a one-time fee of $263,008 to the owners of 3DFV, Mr. Joseph DiFrancesco and his spouse Bernadette, and issue an amount of shares of SKGP common stock to 3DFV equivalent to render 3DFV’s percentage of stock ownership in the Company equal to that of Mr. Richard Shergold, the Company’s President and Chairman, who currently owns 156,949,209 shares (44.22%). This issuance to 3DFV will amount to approximately 156,949,209 shares of the Company’s common stock. In addition, 3DFV’s President, Mr. Joseph DiFrancesco, will be appointed as the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Pursuant to the License Agreement, Mr. DiFrancesco has also been granted the right to appoint an additional board member in his sole and absolute discretion.
Our loss of either of these license agreements would have a material adverse affect on our business and operations.
The limited public trading market may cause volatility in our stock price.
The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our common stock is thus and will be subject to significant volatility. Sales of substantial amounts of our common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock.
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time. Sales of shares of our common stock in the public market covered under an effective registration statement, or the perception that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.
We do not expect to generate cash flow from operations for the foreseeable future. We will need to raise capital in the future by selling more common stock and if we are able to do so, your ownership of the Company’s common stock will be diluted.
We do not expect to generate cash flow from operations for the foreseeable future. Consequently, we will be required to raise additional capital by selling additional shares of common stock. There can be no assurance that we will be able to do so but if we are successful in doing so, your ownership of the Company’s common stock will be diluted which might depress the market price of our common stock, if a market ever develops.
Our history of losses is expected to continue and we will need to obtain additional capital financing in the future.
We have a history of losses and expect to generate losses until such a time when we can become profitable in the distribution of our planned products. As of the date of this Report, we cannot provide an estimate of the amount of time it will take to become profitable, if ever; however, we do not believe we will become profitable within the next 24 months.
We will be required to seek additional financing in the future to respond to increased expenses or shortfalls in anticipated revenues, accelerate product development, respond to competitive pressures, develop new or enhanced products, or take advantage of unanticipated acquisition opportunities. In order for us to carry out our intended business plan, management believes that we need to raise approximately $12 million over a two year period. Management anticipates that the $12 million will go towards fulfillment of existing liabilities, regulatory compliance, product marketing, the production and development of existing and new product lines including our new animated TV series, our plans for character-based merchandising, and the development and launching of our plans to franchise kiosks and retail outlets. The Company anticipates obtaining the required funding through equity investment in the company. The Company has begun to contact institutional investors and other similar sources to obtain financing. As of the date of this Report, no such agreements for financing have been entered into by the Company. We cannot be certain we will be able to find such additional financing on reasonable terms, or at all. If we are unable to obtain additional financing when needed, we could be required to modify our business plan in accordance with the extent of available financing made available to our Company. If we obtain the anticipated amount of financing through the offering of our equity securities, this will result in substantial dilution to our existing shareholders, and should be considered a serious risk of investment.
We expect our operating expenses to increase and may affect profit margins and the market value of our common stock.
Upon obtaining additional capital, we expect to significantly increase our operating expenses to expand our marketing operations, and increase our level of capital expenditures to further develop and maintain our proprietary software systems. Such increases in operating expense levels and capital expenditures may adversely affect operating results and profit margins which may significantly affect the market value of common stock. There can be no assurance that we will, one day, achieve profitability or generate sufficient profits from operations in the future.
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Current economic conditions may prevent us from generating revenue.
Generally, consumer purchases of entertainment and educational items are discretionary and may be particularly affected by adverse trends in the general economy. Our ability to generate or sustain revenues is dependent on a number of factors relating to discretionary consumer spending. These include economic conditions and consumer perceptions of such conditions by consumers, employment, the rate of change in employment, the level of consumers' disposable income and income available for discretionary expenditure, business conditions, interest rates, consumer debt and asset values, availability of credit and levels of taxation for the economy as a whole and in regional and local markets where the our Company operates.
The United States is currently experiencing a major economic downturn, the extent and duration of which cannot be currently predicted, and includes a record low levels of consumer confidence due, in part, to job losses. Due to these factors, consumers are not expected to purchase non-essential goods, including our products. If the current economic conditions do not improve, we may not achieve or be able to maintain profitability which may negatively affect the liquidity and market price of our common stock.
Also due to the economic downturn in the United States, credit and private financing is becoming difficult to obtain at reasonable rates, if at all. Until we achieve profitability at sufficient levels, if at all, we will be required to obtain loans and/or private financings to develop and sustain our operations. If we are unable to achieve such capital infusions on reasonable terms, if at all, our operations may be negatively affected.
The changing entertainment preferences of consumers could adversely affect our business.
Our business and operating results depend upon the appeal of our products, product concepts and programming to consumers. Consumer entertainment preferences, as well as industry trends and demands are continuously changing and are difficult to predict as they vary over time. In addition, as entertainment properties often have short life cycles, there can be no assurances that:
| (i) | our current products, product concepts or programming will ever be popular for any significant period of time; |
| (ii) | new or existing products, product concepts or programming we represent or produce will achieve and or sustain popularity in the marketplace; |
| (iii) | a product’s life cycle will be sufficient to permit us to recover revenues in excess of the costs of advance payments, guarantees, development, marketing, royalties and other costs relating to such product; or |
| (iv) | we will successfully anticipate, identify and react to consumer preferences. |
Our failure to accomplish any of these events could result in reduced overall revenues, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the volatility of consumer preferences could cause our revenues and net income to vary significantly between comparable periods.
We operate in a highly competitive marketplace.
The marketplace for children’s entertainment and educational products is extremely competitive, relatively saturated, and dominated by larger well know and seasoned companies. There is no guarantee that we can favorably compete with such competitors. Our principal competitors are media companies with consumer products/merchandise licensing divisions, toy companies, other licensing companies, and numerous individuals who act as merchandising agents. There are also many independent product development firms with which we compete. Many of these companies have substantially greater resources than we do and represent properties which have been proven commercially successful. We believe that it would be relatively easy for a potential competitor to enter into this market in light of the relatively small investment required to commence operations as a merchandising agent.
There can be no assurance that the Company will be able to enhance its products or services, or develop other products or services.
To date, we have had no revenues. As of June 30, 2010, we had $112 cash on-hand and an accumulated deficit of $2,261,473, and there is substantial doubt as to our ability to continue as a going concern. If we are unable to achieve profitability in the future, recruit sufficient personnel or raise money in the future, our ability to develop its products and services or other products and services would be adversely affected. Our inability to develop our products and services or develop new products or services, in view of rapidly changing technology, changing customer demands and competitive pressures, would have a material adverse affect upon its business, operating results and financial condition.
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Rapid technological advances could render our existing proprietary technologies obsolete.
The Internet and online commerce industries are characterized by rapid technological change, changing market conditions and customer demands, and the emergence of new industry standards and practices that could render our existing Web site and proprietary technology obsolete. Our future success will substantially depend on our ability to enhance our existing services, develop new services and proprietary technology and respond to technological advances in a timely and cost-effective manner. The development of other proprietary technology entails significant technical and business risk. There can be no assurance that we will be successful in developing and using new technologies or adapt our proprietary technology and systems to meet emerging industry standards and customer requirements. If we are unable, for technical, legal, financial, or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, or if our new products and electronic commerce services do not achieve market acceptance, our business, prospects, results of operations and financial condition would be materially adversely affected.
Internet commerce security threats could pose a risk to our online sales and overall financial performance.
A significant barrier to online commerce is the secure transmission of confidential information over public networks. We and our partners rely on encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information. There can be no assurance that advances in computer capabilities; new discoveries in the field of cryptography or other developments will not result in a compromise or breach of the algorithms used by us and our partners to protect consumer’s transaction data. If any such compromise of security were to occur, it could have a materially adverse effect on our business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Concerns over the security of transactions conducted on the Internet and the privacy of users may also hinder the growth of online services generally, especially as a means of conducting commercial transactions. To the extent that our activities, our partners or third-party contractors involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. There can be no assurance that our security measures will not prevent security breaches or that failure to prevent such security breaches will not have a materially adverse effect on our business, prospects, financial condition and results of operations.
Our management and directors own a significant amount of our common stock, giving them influence or control in corporate transactions and other matters, and their interests could differ from those of other stockholders.
As of the date of this Report, our management and directors as a group own 8124% of our outstanding common stock. As a result, they are in a position to significantly influence the outcome of matters requiring a stockholder vote, including the election of directors, the adoption of any amendment to our articles of incorporation or bylaws, and the approval of significant corporate transactions. Their control may delay or prevent a change of control on terms favorable to our other stockholders and may adversely affect your voting and other stockholders rights.
Risk of Capacity Constraints; Reliance on Internally Developed Systems; System Development Risks.
A key element of our strategy is to generate a high volume of traffic on, and use of, our services across our network infrastructure and systems. Accordingly, the satisfactory performance, reliability and availability of our software systems, transaction-processing systems and network infrastructure are critical to our reputation and our ability to attract and retain customers, as well as maintain adequate customer service levels. Our revenues depend on the number of visitors who sign up for our services. Any systems interruptions that result in the unavailability of our software systems or network infrastructure, or reduced order placements would reduce the volume of sign ups and the attractiveness of our product and service offerings. We may experience periodic systems interruptions from time to time. Any substantial increase in the volume of traffic on our software systems or network infrastructure will require us to expand and upgrade further our technology, transaction-processing systems and network infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our Web site or timely expand and upgrade our systems and infrastructure to accommodate such increases. We will use a combination of industry supplied software and internally developed software and systems for our search engine, distribution network, and substantially all aspects of transaction processing, including order management, cash and credit card processing, and accounting and financial systems. Any substantial disruptions or delays in any of our systems would have a materially adverse effect on our business, prospects, financial condition and results of operations.
There are risks associated with our domain names.
We currently hold various Web domain names relating to our brand. The acquisition and maintenance of domain names is generally regulated by governmental agencies and their designees. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, there can be no assurance that we will be able to acquire or maintain relevant domain names in all of the countries in which it conducts business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We, therefore, may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. Any such inability could have a materially adverse effect on our business, prospects, financial condition and results of operations.
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Storage of personal information about our customers could pose a security threat.
We have a non-disclosure policy displayed on our Web sites. Our policy is not to willfully disclose any individually identifiable information about any user to a third party without the user’s consent. This policy is accessible to users of our services when they initially register. Despite this policy, however, if third persons were able to penetrate our network security or otherwise misappropriate our users’ personal information or credit card information, we could be subject to liability. These could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, such as for unauthorized marketing purposes.
These claims could result in litigation. In addition, the Federal Trade Commission and other states have been investigating certain Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if they chose to investigate our privacy practices.
We face possible liability for information displayed on our web sites.
We may be subjected to claims for defamation, negligence, copyright or trademark infringement or based on other theories relating to the information we publish on our Web site and across our distribution network. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We could also be subjected to claims based upon the content that is accessible from our Web sites and distribution network through links to other Web sites. Our insurance may not adequately protect us against these types of claims.
We are highly dependent on our executive officers, particular Mr. Richard Shergold and Mr. Joseph DiFrancesco. The loss of either of them would have a material adverse affect on our business and prospects.
We currently have three executive officers, Richard Shergold, Joseph DiFrancesco and Lisa Yakiwchuk. Richard Shergold serves as our President and Chief Creative Officer and Co-Chairman. Mr. DiFrancesco serves as our Chief Executive Officer and Co-Chairman. Ms. Yakiwchuk serves as our Chief Operating Officer, Secretary and Director. The loss of any of our executive officers could have a material adverse effect on our business and prospects.
There exists uncertainty with regards to our ability to protect our vital Sublicensed Intellectual Property.
Our prospects for success may depend, in part, on our ability to obtain commercially valuable patents, trademarks and copyrights to protect Mr. Shergold’s and 3D Future Vision’s intellectual property, which we sublicense directly from SKIH and 3D Future Vision, respectively. Legal standards relating to the validity and scope of patent claims are still evolving. As a result, patent, trademark and copyright positions may be uncertain and will involve complex legal and factual questions. Therefore, the degree of future protection for our technologies or potential products is uncertain. There are numerous costs, risks and uncertainties that the Company faces with respect to obtaining and maintaining patents and other proprietary rights. The Company may not be able to obtain meaningful patent protection for its future developments. To date, neither the Company nor Mr. Shergold have any pending patent or trademark applications with the U.S. Patent and Trademark Office or any agency with regard to the above-referenced intellectual property assets.
In connection with the issued or trademarks, there can be no assurance that such trademarks will provide the Company with significant competitive advantages, or that challenges will not be instituted against the validity or enforceability of any r trademarks sublicensed to the Company or, if instituted, that such challenges will not be successful. To date, there have been no interruptions in our business as the result of any claim of infringement. However, no assurance can be given that the Company will not be adversely affected by the assertion of intellectual property rights belonging to others. The cost of litigation to uphold the validity of a trademark and prevent infringement can be very substantial and may prove to be beyond our financial means even if the Company could otherwise prevail in such litigation. Furthermore, there can be no assurance that others will not independently develop similar designs or technologies, duplicate our designs and technologies or design around aspects of our technology, or that the designs and technologies will not be found to infringe on the patents, trademarks or other rights owned by third parties. The effects of any such assertions could include requiring the Company to alter existing trademarks or products, withdraw existing products, including the products delaying or preventing the introduction of products or forcing the Company to pay damages if the products have been introduced.
Intellectual Property litigation may be necessary and an unfavorable outcome could hurt the company.
We may become party to patent litigation or proceedings at the U.S. Patent and Trademark Office or at a foreign patent office to determine whether it can market its future products without infringing patent rights of others. Interference proceedings in the U.S. Patent Office or opposition proceedings in a foreign patent office may be necessary to establish which party was the first to design such intellectual property. The cost of any patent litigation or similar proceeding could be substantial and may absorb significant management time and effort. If an infringement suit against us is resolved unfavorably, we may be enjoined from manufacturing or selling certain of its products or services without a license from an adverse third party. We may not be able to obtain such a license on commercially acceptable terms, or at all.
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There are risks associated with Trade Secret Protection.
We intend to rely on trade secret protection for certain of its confidential and proprietary information and processes. We currently protect some information and procedures as trade secrets. It protects its trade secrets through recognized practices, including access control, confidentiality agreements with employees, consultants, collaborators, and customers, and other security measures. These confidentiality agreements may be breached, however, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
We might face obstacles regarding our Product Development and Marketing.
Development of any product based on our processes and designs will be subject to the high risks of failure inherent in the development or successful commercialization of new products. These risks include the possibility that any such products, will be found to be ineffective, will fail to receive and maintain necessary regulatory approvals, will be difficult or impossible to deploy on a larger scale, will be uneconomical to market, will fail to be developed prior to the successful marketing of similar products by competitors, or will be found to infringe on proprietary rights of third parties.
If we engage in acquisitions, we may experience significant costs and difficulty assimilating the operations or personnel of the acquired companies, which could threaten our future growth.
If we make any acquisitions, we could have difficulty assimilating the operations, technologies and products acquired or integrating or retaining personnel of acquired companies. In addition, acquisitions may involve entering markets in which we have no or limited direct prior experience. The occurrence of any one or more of these factors could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition, pursuing acquisition opportunities could divert our management's attention from our ongoing business operations and result in decreased operating performance. Moreover, our profitability may suffer because of acquisition-related costs or amortization of acquired goodwill and other intangible assets. Furthermore, we may have to incur debt or issue equity securities in future acquisitions. The issuance of equity securities would dilute our existing stockholders. To date, the Company is not in any discussions to make acquisitions with any party.
Because our officers and directors are indemnified against certain losses, we may be exposed to costs associated with litigation.
If our directors or officers become exposed to liabilities invoking the indemnification provisions, we could be exposed to additional non-reimbursable costs, including legal fees. Our articles of incorporation and bylaws provide that our directors and officers will not be liable to us or to any shareholder and will be indemnified and held harmless for any consequences of any act or omission by the directors and officers unless the act or omission constitutes gross negligence or willful misconduct. Extended or protracted litigation could have a material adverse effect on our cash flow.
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
Because none of our directors are independent directors, we do not currently have independent audit or compensation committees. As a result, these directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.
Compliance with changing regulation of corporate governance and public disclosure, and our management’s inexperience with such regulations will result in additional expenses and creates a risk of non-compliance.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. Management’s inexperience may cause us to fall out of compliance with applicable regulatory requirements, which could lead to enforcement action against us and a negative impact on our stock price.
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We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in this annual report on Form 10-K our assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year ended June 30, 2010 (See Item 9AT). We will incur additional expenses and diversion of management’s time as a result of performing the system and process evaluation, testing and remediation required in order to comply with the management certification. If we fail to achieve and maintain adequate internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly.
Additional Risks Relating to Our Common Stock
Currently there is no active market for our common stock.
Our common stock is currently quoted on the OTC Bulletin Board and Pink Sheets under the symbol “SKGP.” While we are a ’34 Act Reporting Company and while our common stock is currently quoted on the OTC Bulletin Board, there is currently no active trading market for the shares and all trading to date has been thin and sporadic. There can be no assurance that any trading market will ever develop or be maintained on the OTC Bulletin Board or any other recognized trading market or exchange. Any trading market for the common stock that may develop in the future will most likely be very stagnant, volatile, and there may be numerous factors beyond our control that may have a significant adverse effect on the market and you might not be able to sell your stock.
We will incur costs now upon becoming a public company and these additional costs could reduce or eliminate our ability to earn a profit.
We are required to file periodic reports with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. In order to comply with these requirements, our independent registered public accounting firm will be required to review our financial statements on a quarterly basis and annually audit our books and records for the fiscal year and report thereon. Moreover, our legal counsel will be retained to review and assist in the preparation of such reports. The costs charged by these professionals for such services and other incidental charges cannot be accurately predicted because factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined at this time and would have a major affect on the amount of time to be spent by our auditors and attorneys. However, the incurrence of such costs would be an expense to our operations and could have a negative effect on our ability to meet our overhead requirements and earn a profit.
We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in this annual report on Form 10-K our assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year ended June 30, 2010 (See Item 9AT). We will incur additional expenses and diversion of management’s time as a result of performing the system and process evaluation, testing and remediation required in order to comply with the management certification. If we fail to achieve and maintain adequate internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly.
Our executive officers are in a position to substantially control matters requiring a stockholder vote.
As of the date of this Report, our executive officers beneficially owned an aggregate of approximately 81.24% of our outstanding common stock. As a result, if they vote together, they may have the ability to control the outcome on all matters requiring stockholder approval including, but not limited to, the election of directors and any merger, consolidation or sale of all or substantially all of our assets. They also have the ability to control our management and affairs.
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Once traded, if ever, our common stock will subject to the "Penny Stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
| · | that a broker or dealer approve a person's account for transactions in penny stocks; and |
| · | the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
| · | obtain financial information and investment experience objectives of the person; and |
| · | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market, which, in highlight form:
| · | sets forth the basis on which the broker or dealer made the suitability determination; and |
| · | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
The market price for our stock may be volatile.
The market price for our stock may be volatile and subject to wide fluctuations in response to factors including the following:
| ● | liquidity of the market for the shares; |
| ● | actual or anticipated fluctuations in our quarterly operating results; |
| ● | changes in financial estimates by securities research analysts; |
| ● | conditions in the markets in which we compete; |
| ● | changes in the economic performance or market valuations of other EDUtainment companies; |
| ● | announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments; |
| ● | addition or departure of key personnel; |
| ● | intellectual property litigation; |
| ● | our dividend policy; and |
| ● | general economic conditions. |
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In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.
Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time. Sales of shares of our common stock in the public market covered under an effective registration statement, or the perception that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.
Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
Our common stock, which is currently and will be quoted for trading on OTCBB, may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act, as amended. Our common stock may be a “penny stock” if it meets one or more of the following conditions: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is not quoted on the Nasdaq Capital Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million. The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in SEC Rules 15-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, SEC Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation, if any.
We have never paid cash dividends on our common stock and we do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their shares of the Company at or above the price they paid for them.
Existing stockholders may experience significant dilution from the sale of our common stock pursuant to the Drawdown Agreement.
The sale of our common stock to Auctus Private Equity Fund LLC in accordance with the Drawdown Equity Facility Agreement may have a dilutive impact on our shareholders. As a result, our net income per share could decrease in future periods and the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise our put option, the more shares of our common stock we will have to issue to Auctus Private Equity Fund LLC. in order to drawdown on the facility. If our stock price decreases, then our existing shareholders would experience greater dilution for any given dollar amount raised through the offering.
The perceived risk of dilution may cause our stockholders to sell their shares, which would contribute to a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
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Auctus Private Equity Fund LLC will pay less than the then-prevailing market price of our common stock which could cause the price of our common stock to decline.
Our common stock to be issued under the Drawdown Equity Facility Agreement will be purchased at a five (5%) discount or 95% of the lowest closing bid price during the five trading days immediately following our notice to Auctus Private Equity Fund LLC of our election to exercise our "put" right.
Auctus Private Equity Fund LLC has a financial incentive to sell our shares immediately upon receiving the shares to realize the profit between the discounted price and the market price. If Auctus Private Equity Fund LLC sells our shares, the price of our common stock may decrease. If our stock price decreases, Auctus may have a further incentive to sell such shares. Accordingly, the discounted sales price in the Drawdown Agreement may cause the price of our common stock to decline.
We registered an aggregate of 38,000,000 shares of common stock to be issued under the Equity Line of Credit with Auctus Private Equity. The sale of such shares could depress the market price of our common stock.
We registered an aggregate of 38,000,000 shares of common stock for issuance pursuant to the Equity Line of Credit under the registration statement filed on May 18, 2010 and deemed effective on May 26, 2010 by the SEC. The sale of these shares into the public market by Auctus could depress the market price of our common stock.
We May Not Have Access to the Full Amount under the Equity Line.
On October 6, 2010, the closing price of our common stock was $0.004 based on very little volume. There is no assurance that the market price of our common stock will increase substantially in the near future. The entire commitment under the Equity Line of Credit is $10,000,000. The number of common shares that remains issuable is lower than the number of common shares we need to issue in order to have access to the full amount under the Equity Line of Credit. Therefore, we may not have access to the remaining commitment under the equity line unless we amend our Articles of Incorporation to increase the number of authorized common shares and/or the market price of our common stock increase substantially.
There may not be sufficient trading volume in our common stock to permit us to generate adequate funds.
The Drawdown Equity Financing Agreement provides that the dollar value that we will be permitted to draw from Auctus will be either: (A) 200% of the average daily volume in the US market of the common stock for the twenty trading days prior to the Drawdown Notice, or (B) $200,000. If the average daily trading volume in our common stock is too low, it is possible that we would only be permitted to draw $200,000, which may not provide adequate funding for our planned operations.
Unless an active trading market develops for our securities, you may not be able to sell your shares.
Although, we are a reporting company and our common shares are quoted on the OTC Bulletin Board (owned and operated by the Nasdaq Stock Market, Inc.) under the symbol “SKGP”, there is not currently an active trading market for our common stock and an active trading market may never develop or, if it does develop, may not be maintained. Failure to develop or maintain an active trading market will have a generally negative effect on the price of our common stock, and you may be unable to sell your common stock or any attempted sale of such common stock may have the effect of lowering the market price and therefore your investment could be a partial or complete loss.
Since our common stock is thinly traded it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.
Since our common stock is thinly traded its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including:
| · | the trading volume of our shares; |
| · | the number of securities analysts, market-makers and brokers following our common stock; |
| · | changes in, or failure to achieve, financial estimates by securities analysts; |
| · | new products or services introduced or announced by us or our competitors; |
| · | actual or anticipated variations in quarterly operating results; |
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| · | conditions or trends in our business industries; |
| · | announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; |
| · | additions or departures of key personnel; |
| · | sales of our common stock; and |
| · | general stock market price and volume fluctuations of publicly-traded, and particularly microcap, companies. |
You may have difficulty reselling shares of our common stock, either at or above the price you paid, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company. In addition, securities class action litigation has often been initiated following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business. Moreover, and as noted below, our shares are currently traded on the OTC Bulletin Board and, further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.
Trading in our common stock on the OTC Bulletin Board may be limited thereby making it more difficult for you to resell any shares you may own.
Our common stock is quoted on the OTC Bulletin Board (owned and operated by the Nasdaq Stock Market, Inc.). The OTC Bulletin Board is not an exchange and, because trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a national exchange or on the Nasdaq National Market, you may have difficulty reselling any of the shares of our common stock that you may own.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Description of Properties
The Company shares office space at the residence of the Co-Chairman of the Board and Chief Development Officer located in Edmonton, Canada at no cost. In addition, the Company maintains its principal executive office at the residence of the Chief Executive Officer and Co-Chairman of the Company in Longwood, Florida at no cost.
For the years ended June 30, 2010 and 2009, the rent expense was zero.
Item 3. Legal Proceedings
The Company is not party to any legal proceedings nor is it aware of any investigation, claim or demand made on the Company that may reasonably result in any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for our Common Stock
Our common stock is currently quoted on the OTC Bulletin Board and Pink Sheets under the symbol “SKGP.” While we are a ’34 Act Reporting Company and while our common stock is currently quoted on the OTC Bulletin Board, there is currently no active trading market for the shares, and any trading that has occurred in the past year has been very thin and sporadic. There can be no assurance that any trading market will ever develop or be maintained on the OTC Bulletin Board or any other recognized trading market or exchange. Any trading market for the common stock that may develop in the future will most likely be very stagnant, volatile, and there may be numerous factors beyond our control that may have a significant adverse effect on the market and you might not be able to sell your stock.
The Securities and Exchange Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation system.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of Securities' laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type, size and format, as the Securities and Exchange Commission shall require by rule or regulation. The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a suitably written statement.
These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock if it becomes subject to these penny stock rules. Therefore, if our common stock becomes subject to the penny stock rules, stockholders may have difficulty selling those securities.
Drawdown Equity Financing Agreement.
On March 18, 2010, we entered into a drawdown equity financing agreement and registration rights agreement (collectively the “Agreements”) with Auctus Private Equity Fund, LLC (“Auctus”), the selling stockholder. In accordance with the Agreements, Auctus has committed, subject to certain conditions, to purchase up to $10 million of the Company’s common stock over a term of up to two years. Although the Company is not mandated to sell shares under the Agreements, the Agreements give the Company the option to sell to Auctus shares of common stock at a per share purchase price of equal to 95% of the lowest closing bid price during the five trading days following the Company’s delivery of notice to Auctus (the “Notice”). At its option, the Company may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The floor shall be 75% of the average closing bid price of the stock over the preceding ten days prior to the Notice and can be waived at the discretion of the Company. The maximum amount of Common Stock that the Company can sell pursuant to any Notice is the greater of: (i) an amount of shares with an aggregate maximum purchase price of $250,000 or (ii) 200% of the average daily trading volume based on 20 days preceding the drawdown notice date.
Auctus is not required to purchase the shares, unless the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the federal securities laws, including the Securities Act of 1933, as amended, laws and except for conditions outside of Auctus’ control. The Company was obligated to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 within 90 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing. The Company filed a registration statement on May 18, 2010, which was declared effective on May 26, 2010 by the SEC. The Company agreed to pay Auctus an aggregate amount of $15,000 as an origination fee with respect to the transaction.
Holders of Our Common Stock
As of the date of this annual report, we have approximately 149 holders of record of our common stock.
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General
Under our Certificate of Incorporation, we are authorized to issue an aggregate of 400,000,000 shares of common stock, par value $0.0001 per share, or Common Stock and no shares of preferred stock. As of the date hereof, 354,917,209 shares of our common stock are issued and outstanding, and there are approximately 149 holders of record of our Common Stock.
Common Stock
Pursuant to our bylaws, our common stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Except as otherwise required by law, the holders of our common stock possess all voting power. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of our common stock that are present in person or represented by proxy. Holders of our common stock representing one-percent (1%) of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our Certificate of Incorporation. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors.
The holders of shares of our common stock will be entitled to such cash dividends as may be declared from time to time by our board of directors from funds available therefore.
Upon liquidation, dissolution or winding up of our company, the holders of shares of our common stock will be entitled to receive, on a pro rata basis, all assets of our company available for distribution to such holders.
In the event of any merger or consolidation of our company with or into another company in connection with which shares of our common stock are converted into or exchangeable for shares of stock, other securities or property (including cash), all holders of our common stock will be entitled to receive the same kind and amount of shares of stock and other securities and property (including cash), on a pro rata basis.
Holders of our common stock have no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to our common stock.
Dividend Policy
We currently anticipate that no cash dividends will be paid on our common stock in the foreseeable future. Our Board periodically will reevaluate this dividend policy taking into account our operating results, capital needs, and the terms of our existing financing arrangements and other factors.
Share Purchase Warrants
We have not issued and do not have outstanding any warrants to purchase shares of our common stock.
Options
We do not have a stock option plan in place nor are there any outstanding exercisable for shares of our common stock.
Recent Sales of Unregistered Securities
On March 8, 2005, the Company issued an aggregate of 15,000 shares of common stock to Sean Slipchuk for services rendered. Mr. Slipchuk rendered services related to website design, website development and maintenance. In aggregate, Mr. Slipchuk billed the Company $1,500 for these services, and agreed to accept stock in lieu of cash payment at a price of $0.10 per share. These shares were issued without registration under the Securities Act of 1933, as amended, under the exemption afforded the Company under Section 4(2) promulgated thereunder due to the fact that such issuance did not involve a public offering.
On July 11, 2006, the Company issued an aggregate of 250,000 shares of common stock to Reich Bros. in consideration for services rendered as a business advisor. These shares were rendered in accordance with the Agreement between the Company and Reich Brothers dated June 8, 2006. These shares were issued without registration under the Securities Act of 1933, as amended, under the exemption afforded the Company under Section 4(2) promulgated thereunder due to the fact that such issuance did not involve a public offering.
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On December 15, 2007, the Company issued an aggregate of 200,000 shares of common stock to Nimbus Development Corp. for services rendered. Nimbus development rendered business consulting services relating advisement of the Company becoming publicly traded and reporting with the SEC. Nimbus Development billed the Company $20,000 for these services, and agreed to accept stock in lieu of cash payment at a price of $0.10 per share. These shares were issued without registration under the Securities Act of 1933, as amended, under the exemption afforded the Company under Section 4(2) promulgated thereunder due to the fact that such issuance did not involve a public offering.
As of the date of this report, the Company has raised $239,600 from the stock subscription agreement dated September 1, 2007 wherein 2,396,000 shares of common stock have been issued as of August 6, 2009. Of the $239,600, 1,050,000 ($105,000) shares were issued on December 27, 2007, and 1,346,000 ($134,600) shares were issued on August 6, 2009. With regards to the 2,396,000 shares of common stock issued, there were no written stock subscription agreements executed by such investors at the time of investment. The investors were all prior investors in the predecessor Company, Bert Holdings, and they were close personal friends of Mr. Richard Shergold, the Company’s founder. Because of the nature of their relationship with Mr. Shergold, a verbal agreement was reached for their cash investments in SKGP. The investors of the $239,600 have all subsequently executed stock subscription agreements related to their respective investments.
These securities were issued under the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded the Company under Section 4(2) and Regulation S promulgated thereunder due to the fact that the issuance did not involve a public offering and the investors were non-US residents.
Issuance of SKGP Common Stock to the former shareholders of Be Alert Bert Holdings, Inc.
In connection with the dissolution of Be Alert Bert Holdings, Inc. (“Bert Holdings”) in 2003, in 2005, we issued shares of SKGP common stock to the former shareholders of Bert Holdings. An aggregate of 1,065,000 shares of Common Stock were issued to an aggregate of 48 people. Bert Holdings was in no way affiliated with our Company. Our Company’s founder, Mr. Shergold, was the former President and CEO of Bert Holdings. Bert Holdings filed for bankruptcy and was dissolved in 2003. Upon its dissolution, Mr. Shergold transferred all of his intellectual property to Smart Kids International Holdings, Inc.
While under no legal obligation to do so, Mr. Shergold issued shares of SKGP to the former shareholders of Bert Holdings who had invested in Bert Holdings and subsequently lost their respective investments upon that Company’s bankruptcy and dissolution. This issuance of SKGP stock was not compelled by any legal action or legal requirement. Mr. Shergold issued the shares to the respective recipients in an amount as determined in his sole discretion, not based upon the recipient’s former interest in Bert Holdings.
The Company issued these securities for past consideration under the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded the Company under Regulation S promulgated thereunder due to the fact that the issuance did not involve a public offering and the investors were non-US residents. As discussed above, an aggregate of 1,065,000 shares of Common Stock were issued to approximately 48 people for past consideration. The 48 recipients of SKGP common stock were investors and former shareholders of Bert Holdings who invested sums of money at the time of the formation of Bert Holdings which led to the subsequent development of Mr. Shergold’s Intellectual Property. While not compelled and under no legal requirement to do so, Mr. Shergold, in good faith, issued these shareholders their respective shares of common stock in SKGP in light of their initial investments in Bert Holdings.
On August 6, 2010, 1,346,000 shares of Common Stock of the Company were issued for $134,600 in stock subscribed to prior to June 30, 2009 at an average per share price of $0.10. This $134,600 was reflected on the balance sheet as of June 30, 2009 as a current liability until the shares were issued in the year ended June 30, 2010.
The Company issued a total of 3,063,500 shares of Common Stock of the Company during the year ended June 30, 2010 for $272,600 for past consideration at an average per share price of $0.09.
| · | 1,550,000 shares of Common Stock of the Company were issued on September 4, 2009 to three individuals |
| · | 992,500 shares of Common Stock of the Company were issued on December 20, 2009 to seven individuals |
| · | 521,000 shares of Common Stock of the Company were issued May 11, 2010 to three individuals |
The Company issued a total of 650,000 shares of Common Stock of the Company during the year ended June 30, 2010 for $37,500 for services rendered on behalf of the Company during the year ended June 30, 2010 at an average per share price of $0.06.
| · | 200,000 shares of Common Stock of the Company were issued effective September 30, 2009 to one individual |
| · | 150,000 shares of Common Stock of the Company were issued on November 15, 2009 to one individual |
| · | 50,000 shares of Common Stock of the Company were issued on December 20, 2009 to one individual |
| · | 250,000 shares of Common Stock of the Company were issued on May 6, 2009 to one individual |
The Company issued a total of 3,925,000 shares of Common Stock of the Company during the year ended June 30, 2010 for $254,000 of cash consideration at an average per share price of $0.06.
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| · | 175,000 shares of Common Stock of the Company were issued on October 2, 2009 to two individuals |
| · | 125,000 shares of Common Stock of the Company were issued on December 20, 2009 to one individual |
| · | 1,750,000 shares of Common Stock of the Company were issued effective December 31, 2009 to one individual |
| · | 250,000 shares of Common Stock of the Company were issued on January 18, 2010 to one individual |
| · | 625,000 shares of Common Stock of the Company were issued effective March 31, 2010 to two individuals |
| · | 1,000,000 shares of Common Stock of the Company were issued effective June 30, 2010 to four individuals |
On June 25, 2010, 10,000,000 shares of Common Stock of the Company were issued under a drawdown equity financing agreement and registration rights agreement. On March 18, 2010, we entered into a drawdown equity financing agreement and registration rights agreement (collectively the “Agreements”) with Auctus Private Equity Fund, LLC (“Auctus”). In accordance with the Agreements, Auctus has committed, subject to certain conditions, to purchase up to $10 million of the Company’s common stock over a term of up to two years. Although the Company is not mandated to sell shares under the Agreements, the Agreements give the Company the option to sell to Auctus shares of common stock at a per share purchase price of equal to 95% of the lowest closing bid price during the five trading days following the Company’s delivery of notice to Auctus (the “Notice”). At its option, the Company may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The floor shall be 75% of the average closing bid price of the stock over the preceding ten days prior to the Notice and can be waived at the discretion of the Company. The maximum amount of Common Stock that the Company can sell pursuant to any Notice is the greater of: (i) an amount of shares with an aggregate maximum purchase price of $250,000 or (ii) 200% of the average daily trading volume based on 20 days preceding the drawdown notice date.
Auctus is not required to purchase the shares, unless the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the federal securities laws, including the Securities Act of 1933, as amended, laws and except for conditions outside of Auctus’ control. The Company was obligated to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 within 90 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing. The Company filed a registration statement on May 18, 2010, which was declared effective on May 26, 2010 by the SEC. The Company has agreed to pay Auctus an aggregate amount of $15,000 as an origination fee with respect to the transaction.
On June 25, 2010, the Company issued 92,829,209 shares of restricted common stock of the Company in lieu of cash payment for $928,292 of accrued salaries and license fees at a per share price of $.01 These restricted common shares are subject to lock-up agreements. On August 6, 2009, the Company issued 1,346,000 shares of restricted common stock of the Company to investors for total cash consideration of $134,600, which as of June 30, 2009, were classified as deposits from stock subscriptions in the accompanying financial statements.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with "Selected Historical Financial Data" and our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under "Risk Factors," "Special Note Regarding Forward-Looking Statements" and elsewhere in this report.
Forward Looking Statements
Some of the information in this section contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:
| · | discuss our future expectations; |
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| · | contain projections of our future results of operations or of our financial condition; and |
| · | state other "forward-looking" information. |
We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this report. See "Risk Factors."
Unless stated otherwise, the words “we,” “us,” “our,” “the Company” or “SKGP” in this report collectively refers to the Company.
Business Overview
General
Smart Kids Group, Inc. (throughout this report referred to as “we,” “us,” “the Company,” “Smart Kids Group” or “SKGP”) is a development stage company incorporated in the State of Florida on February 11, 2003. From our inception, we have not generated any revenues and as of June 30, 2010, we have incurred a net loss of $2,261,473. As of June 30, 2010, we had $112 in cash on hand, total assets of $407,291, total liabilities of $650,739, an accumulated deficit of $2,261,473 and a stockholders’ deficit of $243,448. In our auditor’s report included in their audit for fiscal year ended June 30, 2010 and 2009, they expressed substantial doubt as to our ability to continue as a going concern.
Based on the Be Alert Bert® and Gina D Brand Library® intellectual property we sublicense from affiliate companies, we have developed educational and entertaining media products (television shows, video, music and books) relating to Be Alert Bert® character and his friends, and the Gina D Brand Library®. Our media products are intended to entertain and educate children ranging from the age of six through twelve years old with a particular focus on children’s personal safety, health and fitness and related issues. Our products are sometimes referred to in this Report as “EDUtainment products.” EDUtainment is a genre of children’s products that serve to educate as well as entertain children.
We plan to use the Be Alert Bert® and Gina D Brand Library® children oriented characters and products that we license as a common theme of recognition to develop a children’s website, “Smart Kids Community”, which is intended to be launched in the First Quarter of 2011 contingent upon our ability to obtain sufficient financing. Through this membership website, we intend to offer for sale, videos, music, books and other Be Alert Bert® and Gina D Brand Library® content that we sublicense from affiliates, as well as new content and merchandise we will develop and own. We anticipate that we will require approximately $2 million to complete and launch and market this website. While no arrangements have been made, we intend to obtain the necessary financing for this project through the sale of equity securities in the near future. We also plan to develop a character based children’s TV series for release in 2010.
A detailed description of our business and strategic business plan is more fully described in the section entitled “Our Business” section of this Report. Investors are encouraged to read such section as well as consider the risk factors in this report.
Richard Shergold Exclusive Licensing Agreement
All intellectual property relating to Be Alert Bert® including the trademarks and work product that the Company currently works with are under an exclusive sublicense agreement with Smart Kids International Holdings, Inc., (“SKIH”) which leases all of the intellectual property relating to Be Alert Bert® from Mr. Shergold, the Company’s President, Chief Creative Officer and Co-Chairman of the Board. This sublicense agreement has been effective since June 20, 2005, at an annual fee of $60,000. Effective January 1, 2010, this licensing agreement was the subject of the Board of Directors’ resolution to no longer accrue licensing fees for this agreement until further notice. On June 25, 2010, 18,421,000 restricted common shares were issued in exchange for the outstanding and accrued licensing fees as of December 31, 2009 in the amount $184,211 at a per share price of $0.01.
The term of the sublicense agreement is 25 years. We also have the option to extend the sublicense agreement in perpetuity. The royalty fee under the sublicense agreement is $5,000 per month. SKIH has the right to terminate, if not otherwise cured within 45 days after notice, the sublicense agreement in the event we become insolvent, file bankruptcy proceedings either voluntary or involuntary, abandon the sublicense, assign the sublicense without SKIH’s written consent, fail to observe or perform any of our obligations under the sublicense agreement, or if there is a change of control of our Company. Upon the expiration or termination of the sublicense agreement, we have the right to sell any licensed products on hand as of the expiration date or termination of the sublicense agreement subject to the payment of royalties to SKIH, if applicable.
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The sublicense allows us to use the trademarks, domain names and copyrights, concepts and characters in connection with the manufacture, distribution, sale, global advertisement, and otherwise ability to profit from the products relating to such Be Alert Bert® intellectual property. Our sublicense also permits us to create new stories and products utilizing the sublicensed intellectual property and to license and otherwise profit from those newly created stories and products. All newly created stories and products generated from the sublicensed intellectual property will be owned by us, without any additional payment owed to SKIH aside from the monthly royalty fee.
The licensed intellectual property relating to Be Alert Bert® television series consist of 31 episodes featuring “Bert the Bee” and are available in both English and Spanish. We intend to generate revenue from this series through licensing contracts with TV stations and through sales to the public through our planned “Live at the Hive” website discussed below. There are currently no residual revenues being generated by the television series because the licensing fees were paid up front on a one-time, flat-fee basis, and the contract term is still active.
Upon expiration of the existing terms pursuant to our outstanding licensing agreements with TV stations, we will attempt to renegotiate renewal agreements upon similar terms or through bartering for advertisement TV time. License renewals are expected to commence towards the end of 2010.
We plan to use children-oriented characters and products as a common theme to develop our main relating to Be Alert Bert® children’s website, “Live at the Hive” (www.liveatthehive.com), which we intend to launch either in the Fourth Quarter of 2010, or First Quarter of 2011. The Company intends to charge an annual membership fee (after a 30 day trial period) of $19.99 per family which will provide them with access to some of our content and through which they will be able to purchase our videos, music, books and other content that we either sublicense or produce. Revenue from this source is intended to provide us with short-term operating funds.
3D Future Vision, Inc. Exclusive Licensing Agreement
Effective September 9, 2010, SKGP and 3D Future Vision, Inc., a Florida corporation ("3DFV”), entered into a License Agreement (the “License Agreement”) on an exclusive basis for a term of twenty five (25) years. Pursuant to the License Agreement, 3DFV grants certain rights under its proprietary intellectual property related to the Gina D Brand Library® intellectual property inventory (“Licensed IP”) to SKGP to make, have made, import, use, offer for sale, promote, distribute, sell products and processes, and otherwise commercially exploit the Licensed IP in all fields and any manner as deemed necessary in the sole discretion of the Company.
In consideration for the execution of the License Agreement and for the exclusivity of the license, SKGP has agreed to pay a one-time fee of $263,008 to the owners of 3DFV, Mr. Joseph DiFrancesco and his spouse Bernadette, and issue an amount of shares of SKGP common stock to 3DFV equivalent to render 3DFV’s percentage of stock ownership in the Company equal to that of Mr. Richard Shergold, the Company’s President and Co-Chairman of the Board of Directors , who currently owns 156,949,209 shares (44.22%). This issuance to 3DFV will amount to approximately 156,949,209 shares of the Company’s common stock. As of October 14, 2010, 3DFV has been issued 100,000,000 shares of restricted common stock; the remaining shares of restricted common stock have yet to be issued subject to the requisite filings with the SEC to increase the number of authorized shares of common stock. In addition, 3DFV’s President, Mr. Joseph DiFrancesco, has been appointed as the SKGP’s Chief Executive Officer and Co-Chairman of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Pursuant to the License Agreement, Mr. DiFrancesco was granted the right to appoint an additional board member in his sole and absolute discretion, and he subsequently appointed Mr. Michael Gibilisco for consideration.
At the time of the pending merger, 3DFV and Richard Shergold will be issued the number restricted common shares for the amount agreed upon which is 200 million shares each in total. A change of control clause exists in the licensing agreement for SKGI, but will be amended to be an even split between SKGP and 3DFV.
There are no material relationships between the Company or its affiliates and any of the parties to the License Agreement, other than with respect to the License Agreement.
The exclusive license gives SKGP exclusive worldwide rights to the Gina D Brand Library® and creates a working partnership with 3D Future Vision in an effort to create a revenue stream by marketing and selling DVD's, CD's, toys, and other ancillary products derived from the Gina D Brand Library® of television programs, valued at $7,500,000. In addition, the license allows SKGP to sell 2D to 3D conversions of content and sell 3D digital displays to generate advertising revenues.
Provided that all monetary terms and conditions of the Licensing Agreement, the Addendums and Amendments to the Licensing Agreement are met, the license shall remain in force. Should there be a breach in the Agreement, or if SKGP fails to remain on the OTCBB, the License will terminate.
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The Gina D Brand Library® television programs can be seen worldwide over 30 times a week on major Christian cable and broadcast television networks including: the Trinity Broadcasting Network (TBN), the Smile of a Child 24/7 Network, the Christian Television Network (CTN), the World Harvest-LeSea Network (WHT), the Victory Television Network (VTN), the AMGTV Network, and the TCT Television Network through Broadcast Stations, DirectTV, Dish Network, Sky Angel, Comcast, Brighthouse Network and a number of other Christian and Family cable networks and Broadcast Stations. The programs can be seen in the following territories: United States, Europe, Middle East, Australia, New Zealand, S.E. Asia, Africa, Russia and on Canada's own Miracle Channel.
To capitalize on all of the current television exposure, the company plans to raise money to distribute and promote “Sing Along with Gina D & Bert The Bee” a pre-school family Television Special, DVD’s and CD’s to be sold domestically and internationally narrated in English by American “Radio Icon” Casey Kasem and in Spanish. SKGP will also manufacture and distribute all the “Gina D Brand Library® products consisting of 57 DVD’s and over 340 Original Song CD’s & Music Videos which are all owned by 3DFV and licensed to the Company. SKGP plans on distributing the Gina D Brand Library® products through large retail outlets and large books stores. Additionally these products are anticipated to be sold over the Internet online retailers.
To accomplish this, the Company will need to raise substantial additional financing. As of the date of this report, no such contractual arrangements have been made to distribute the Company’s products as described above, and no such financing has been attained.
Drawdown Equity Financing Agreement.
On March 18, 2010, we entered into a drawdown equity financing agreement and registration rights agreement (collectively the “Agreements”) with Auctus Private Equity Fund, LLC (“Auctus”), the selling stockholder. In accordance with the Agreements, Auctus has committed, subject to certain conditions, to purchase up to $10 million of the Company’s common stock over a term of up to two years. Although the Company is not mandated to sell shares under the Agreements, the Agreements give the Company the option to sell to Auctus shares of common stock at a per share purchase price of equal to 95% of the lowest closing bid price during the five trading days following the Company’s delivery of notice to Auctus (the “Notice”). At its option, the Company may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The floor shall be 75% of the average closing bid price of the stock over the preceding ten days prior to the Notice and can be waived at the discretion of the Company. The maximum amount of Common Stock that the Company can sell pursuant to any Notice is the greater of: (i) an amount of shares with an aggregate maximum purchase price of $250,000 or (ii) 200% of the average daily trading volume based on 20 days preceding the drawdown notice date.
Auctus is not required to purchase the shares, unless the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the federal securities laws, including the Securities Act of 1933, as amended, laws and except for conditions outside of Auctus’ control. The Company was obligated to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 within 90 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing. The Company filed a registration statement on May 18, 2010, which was declared effective on May 26, 2010 by the SEC. The Company has agreed to pay Auctus an aggregate amount of $15,000 as an origination fee with respect to the transaction.
Going Concern
At June 30, 2010, we had $112 cash on-hand and an accumulated deficit of $2,261,473, and as noted throughout this report and our financial statements and note thereto, our independent auditors have expressed their substantial doubt as to our ability to continue as a going concern. We anticipate incurring significant losses in the future. We do not have an established source of revenue sufficient to cover our operating costs. Our ability to continue as a going concern is dependent upon our ability to successfully compete, operate profitably and/or raise additional capital through other means. If we are unable to reverse our losses, we will have to discontinue operations.
Evolving Industry Standards; Rapid Technological Changes
The Company's success in its business will depend in part upon its continued ability to enhance its existing products and services, to introduce new products and services quickly and cost effectively to meet evolving customer needs, to achieve market acceptance for new product and service offerings and to respond to emerging industry standards and other technological changes. There can be no assurance that the Company will be able to respond effectively to technological changes or new industry standards. Moreover, there can be no assurance that competitors of the Company will not develop competitive products, or that any such competitive products will not have an adverse effect upon the Company's operating results.
Moreover, management intends to continue to implement "best practices" and other established process improvements in its operations going forward. There can be no assurance that the Company will be successful in refining, enhancing and developing its operating strategies and systems going forward, that the costs associated with refining, enhancing and developing such strategies and systems will not increase significantly in future periods or that the Company's existing software and technology will not become obsolete as a result of ongoing technological developments in the marketplace.
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Sufficiency of Cash Flows
Because current cash balances and projected cash generation from operations are not sufficient to meet the Company's cash needs for working capital and capital expenditures, management intends to seek additional equity financing and credit facilities. The sale of additional equity could result in additional dilution to the Company's shareholders. A portion of the Company's cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies. To date, the Company is not in any discussions to make acquisitions with any party.
Results of Operations for the fiscal year ended June 30, 2010 compared to June 30, 2009
Revenues. We did not have any revenue for the fiscal years ended June 30, 2010 and 2009.
Assets. As of June 30, 2010, we had $112 cash on-hand. Our total assets were $407,291 compared to $835,172 at June 30, 2009. This decrease was primarily due to a decrease in software development costs of $475,588 which was based on management’s assessment due to delays in securing revenue from current projects.
Liabilities. Our total liabilities were $650,739 as of June 30, 2010 compared to $1,718,882 at June 30, 2009. This decrease was primarily due to a decrease in due to related parties due to the discontinuance of accruals for officers’ salaries and license fees which the Company’s Board of Directors passed in a resolution effective January 1, 2010. Another factor in this decrease was the Company issuing 92,829,209 restricted common of the stock in exchange for the outstanding and accrued officers’ salaries and licensing fees as of December 31, 2009 in the amount $928,292 at a per share price of $.01.
Total Stockholders’ Deficit. Our stockholders’ deficit was ($243,448) at June 30, 2010 compared to ($883,710) at June 30, 2009.
Net Loss. We had a net loss of ($1,172,730) for the fiscal year ended June 30, 2010 compared to ($579,479) for the fiscal year ended June 30, 2009. This increase was primarily due to an increase in the amount of incurred legal and accounting fees.
Operating expenses. Our operating expenses include website maintenance fees, salaries and wages, general and administrative expenses, legal and professional fees. Our total operating expenses decreased from $505,398 for the fiscal year ended June 30, 2009 to $419,186 for the fiscal year ended June 30, 2010. This decrease was primarily due to the discontinuance of accruals for officers’ salaries and license fees which the Company’s Board of Directors passed in a resolution effective January 1, 2010.
Accounts Payable and Accrued Expenses
As of June 30, 2010 and 2009, the Company incurred $171,181 and $333,039 respectively. The accounts payable primarily consist of consulting fees, audit and legal fees as an SEC reporting company and operating expenses.
Due to Related Parties
As of June 30, 2010 and 2009, the Company incurred $475,558 and $1,251,243 respectively, this decrease is related to the Board of Directors’ resolution to discontinue the accruals of officers’ salaries and license fees which was effective January 1, 2010. The Company issued 92,829,209 restricted common of the stock in exchange for the outstanding and accrued officers’ salaries and licensing fees as of December 31, 2009 in the amount $928,292 at a per share price of $.01.
Liquidity and Capital Resources
Cash Balance. At June 30, 2010, we had approximately $112 cash on-hand. In connection with their audit of our June 30, 2010 financial statements, our independent auditors have expressed their substantial doubt as to our ability to continue as a going concern.
The accompanying financial statements have been prepared on a going-concern basis, which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business.
As reflected in the accompanying financial statements, the Company experienced a net loss of ($1,172,730) for the year ended June 30, 2010 along with an accumulated deficit during the Company’s development stage of ($2,261,473) as of June 30, 2010.
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Between its inception on February 11, 2003 and June 30, 2010, the Company realized net proceeds of $593,633 from the sale of common stock of the Company. For the years ended June 30, 2010 and 2009, the Company generated net losses of ($1,172,730) and ($579,479), respectively. As of June 30, 2010, the Company has an accumulated deficit of ($2,261,473) and had cash and cash equivalents totaling $112.
During the year ended June 30, 2010, the Company realized net proceeds of $254,000 from the sale of common stock of the Company.
Management believes that additional capital will be required to fund operations through the year ended June 30, 2010 and beyond, as it attempts to generate increasing revenue, and develops new products. Management intends to raise capital through additional equity offerings. There can be no assurance that the Company will be successful in obtaining financing at the level needed or on terms acceptable to the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
On August 14, 2009, the United States Securities and Exchange Commission issued the Company a Notice of Effectiveness for the Form S-1; Registration under the Securities Act of 1933. The Company registered 20,198,500 common shares of the Company.
On March 18, 2010, we entered into a drawdown equity financing agreement and registration rights agreement (collectively the “Agreements”) with Auctus Private Equity Fund, LLC (“Auctus”), the selling stockholder. In accordance with the Agreements, Auctus has committed, subject to certain conditions, to purchase up to $10 million of the Company’s common stock over a term of up to two years. Although the Company is not mandated to sell shares under the Agreements, the Agreements give the Company the option to sell to Auctus shares of common stock at a per share purchase price of equal to 95% of the lowest closing bid price during the five trading days following the Company’s delivery of notice to Auctus (the “Notice”). At its option, the Company may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The floor shall be 75% of the average closing bid price of the stock over the preceding ten days prior to the Notice and can be waived at the discretion of the Company. The maximum amount of Common Stock that the Company can sell pursuant to any Notice is the greater of: (i) an amount of shares with an aggregate maximum purchase price of $250,000 or (ii) 200% of the average daily trading volume based on 20 days preceding the drawdown notice date.
Auctus is not required to purchase the shares, unless the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the federal securities laws, including the Securities Act of 1933, as amended, laws and except for conditions outside of Auctus’ control. The Company was obligated to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 within 90 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing. The Company filed a registration statement on May 18, 2010, which was declared effective on May 26, 2010 by the SEC. The Company has agreed to pay Auctus an aggregate amount of $15,000 as an origination fee with respect to the transaction.
The Company is in the process of raising additional financing.
The Company’s operations are subject to certain additional risks and uncertainties including, among others, dependence on outside suppliers and manufacturers, competition, dependence on its exclusive license and relationship with the licensor, uncertainties regarding patents and proprietary rights, dependence on key personnel, and other business risks. In addition, there is no assurance, assuming the Company is successful in raising additional capital that the Company will be successful in achieving profitability or positive cash flow.
Off –Balance Sheet Operations
The Company does not have any off-balance sheet operations, and/or obligations.
Impact of Inflation
It is management's opinion that inflation has had only a negligible effect on our operations in the past several years.
33
CONTRACTUAL OBLIGATIONS AS OF JUNE 30, 2010
There are no contractual obligations on the Company’s Balance sheet as of June 30, 2010.
| Payment due by period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
| Long-Term Debt Obligations | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
| Capital Lease Obligations | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
| Operating Lease Obligations | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
| Purchase Obligations | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
| Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
| Total | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements included herein were prepared in accordance with United States generally accepted accounting principles. Significant accounting policies are as follows:
| a. | Use of Estimates |
The preparation of the statement of financial condition in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statement of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| b. | Cash and Cash Equivalents |
For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents.
| c. | Income Taxes |
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on the differences between financial reporting basis and tax basis of the assets and liabilities and are measured using enacted tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized, when it is more likely than not, that such tax benefits will not be realized.
| d. | Fair Value of Financial Instruments |
The carrying value of cash equivalents, software development costs, and accrued expenses approximates fair value.
| e. | Revenue Recognition |
The Company recognizes revenue using the accrual method of accounting wherein revenue is recognized when earned and expenses and costs are recognized when incurred.
Since inception of the business, February 11, 2003, the Company has not realized any revenue.
| f. | Software Development Costs |
The Company accounts for its software development costs for its products in accordance with Statement of Position #98 issued by the AICPA in March 1998. Effective June 30, 2010, the Company’s management assessed the total costs to date of $882,200 and made an adjustment in the amount of $475,588 due to delays in securing revenue from the current projects. Management intends to amortize these remaining costs of $406,612 over their estimated useful life when the Company realizes revenue.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board Directors
Smart Kids Group, Inc.
Longwood, Florida
We have audited the accompanying balance sheets of Smart Kids Group, Inc. (a development stage company) (the “Company”) as of June 30, 2010 and 2009, and the related statements of operations and comprehensive income (loss), changes in deficiency in assets, and cash flows for years then ended and for the period February 11, 2003 (date of inception) to June 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2010 and 2009, and the results of its operations and its cash flows for the years ended June 30, 2010 and 2009 and for the period February 11, 2003 (date of inception) to June 30, 2010 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note no. 9 to the financial statements, the Company experienced a net loss of $1,172,730 and $579,479 for the years ended June 30, 2010 and 2009 along with an accumulated deficit of $2,261,473 as of June 30, 2010. The Company’s ability to continue as a going concern is dependent upon its ability to achieve profitable operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Conner & Associates, PC
CONNER & ASSOCIATES, PC
Newtown, Pennsylvania
35
| SMART KIDS GROUP, INC. |
| (A Development Stage Company) |
| Balance Sheets |
6/30/2010 | 6/30/2009 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
| Cash | $ | 112 | $ | 78 | ||||
| Prepaid expenses | - | 10,000 | ||||||
| Total current assets | 112 | 10,078 | ||||||
Fixed assets | ||||||||
| Equipment, net | 567 | 794 | ||||||
Other assets | ||||||||
| Software development costs, net | 406,612 | 824,200 | ||||||
| Due from shareholder | - | 100 | ||||||
| Total other assets | 406,612 | 824,300 | ||||||
| Total assets | $ | 407,291 | $ | 835,172 | ||||
LIABILITIES AND DEFICIENCY IN ASSETS | ||||||||
Current liabilities | ||||||||
| Accounts payable, trade | $ | 175,181 | $ | 333,039 | ||||
| Due to related parties | 475,558 | 1,251,243 | ||||||
| Deposits from stock subscriptions | - | 134,600 | ||||||
| Total current liabilities | 650,739 | 1,718,882 | ||||||
| Total liabilities | 650,739 | 1,718,882 | ||||||
| Commitments and contingencies | - | - | ||||||
Deficiency in assets | ||||||||
| Common Stock, $.0001 par value; 400,000,000 shares | ||||||||
| authorized, 234,562,209 and 122,748,500 shares issued and outstanding | 23,456 | 12,275 | ||||||
| Additional paid-in-capital | 1,994,569 | 192,758 | ||||||
| Accumulated deficit during the development stage | (2,261,473 | ) | (1,088,743 | ) | ||||
| Total deficiency in assets | (243,448 | ) | (883,710 | ) | ||||
| Total liabilities and deficiency in assets | $ | 407,291 | $ | 835,172 | ||||
The accompanying notes should be read in conjunction with the financial statements.
36
SMART KIDS GROUP, INC.
(A Development Stage Company)
Statements of Operations and Comprehensive Income (Loss)
| For the period | ||||||||||||
| For the | For the | February 11, 2003 | ||||||||||
| year ended | year ended | (Inception) to | ||||||||||
| June 30, 2010 | June 30, 2009 | June 30, 2010 | ||||||||||
| Revenue | $ | - | $ | - | $ | - | ||||||
| Cost of goods sold | 475,588 | (1) | 73,571 | 549,159 | ||||||||
| Gross profit (loss) | (475,588 | ) | (73,571 | ) | (549,159 | ) | ||||||
| Operating expenses | ||||||||||||
| Salaries and wages | 151,196 | 308,400 | 569,596 | |||||||||
| General and administrative expenses | 36,788 | 1,090 | 146,092 | |||||||||
| Legal and professional fees | 231,202 | 195,908 | 709,472 | |||||||||
| Total operating expenses | 419,186 | 505,398 | 1,425,160 | |||||||||
| Loss from operations | (894,774 | ) | (578,969 | ) | (1,974,319 | ) | ||||||
| Other income (expense) | ||||||||||||
| Stock issued for past consideration | (272,600 | ) | - | (272,600 | ) | |||||||
| Depreciation | (227 | ) | (227 | ) | (9,142 | ) | ||||||
| Total other income (expense) | (272,827 | ) | (227 | ) | (281,742 | ) | ||||||
| Loss before provision for income taxes | (1,167,601 | ) | (579,196 | ) | (2,256,061 | ) | ||||||
| Provision for income taxes | - | - | - | |||||||||
| Net loss | (1,167,601 | ) | (579,196 | ) | (2,256,061 | ) | ||||||
| Other comprehensive income (loss) | ||||||||||||
| Foreign currency translation adjustment | (5,129 | ) (1) | (283 | ) | (5,412 | ) | ||||||
| Total comprehensive income (loss) | $ | (1,172,730 | ) | $ | (579,479 | ) | $ | (2,261,473 | ) | |||
| Net loss per common share | ||||||||||||
| (basis and diluted) | $ | (0.009 | ) | $ | (0.005 | ) | $ | (0.032 | ) | |||
| Weighted average common shares | ||||||||||||
| outstanding (basic and diluted) | 125,729,354 | 122,748,500 | 69,507,452 | |||||||||
| Dividends paid per common share | $ | - | $ | - | $ | - | ||||||
(1) - reclassified for comparison purposes
The accompanying notes should be read in conjunction with the financial statements.
37
SMART KIDS GROUP, INC.
(A Development Stage Company)
Statements of Changes in Deficiency in Assets
| From February 11, 2003 (inception) to June 30, 2010 | ||||||||||||||||||||
| Deficit | ||||||||||||||||||||
| Accumulated | ||||||||||||||||||||
| Additional | During the | Stockholders' | ||||||||||||||||||
| Common Stock | Paid-in | Development | Equity | |||||||||||||||||
| Shares | Amount | Capital | Stage | (Deficit) | ||||||||||||||||
| Balance, February 11, 2003 | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Issuance of common stock | 100 | 1 | 1 | |||||||||||||||||
| Net loss | - | - | ||||||||||||||||||
| Balance, June 30, 2003 | 100 | - | 1 | - | 1 | |||||||||||||||
| Net loss | - | - | - | (81,584 | ) | (81,584 | ) | |||||||||||||
| Balance, June 30, 2004 | 100 | - | 1 | (81,584 | ) | (81,583 | ) | |||||||||||||
| Issuance of common stock | 121,178,500 | 12,118 | 87,914 | - | 100,032 | |||||||||||||||
| Adjustment | (100 | ) | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | (43,840 | ) | (43,840 | ) | |||||||||||||
| Balance, June 30, 2005 | 121,178,500 | 12,118 | 87,915 | (125,424 | ) | (25,391 | ) | |||||||||||||
| Net loss | - | - | - | (24,858 | ) | (24,858 | ) | |||||||||||||
| Balance, June 30, 2006 | 121,178,500 | 12,118 | 87,915 | (150,282 | ) | (50,249 | ) | |||||||||||||
| Net loss | - | - | - | (89,864 | ) | (89,864 | ) | |||||||||||||
| Balance, June 30, 2007 | 121,178,500 | $ | 12,118 | $ | 87,915 | $ | (240,146 | ) | $ | (140,113 | ) | |||||||||
| Issuance of common stock | 1,570,000 | 157 | 104,843 | - | 105,000 | |||||||||||||||
| Net loss | - | - | - | (269,118 | ) | (269,118 | ) | |||||||||||||
| Balance, June 30, 2008 | 122,748,500 | 12,275 | 192,758 | (509,264 | ) | (304,231 | ) | |||||||||||||
| Comprehensive income (loss) | - | - | - | (579,479 | ) | (579,479 | ) | |||||||||||||
| Balance, June 30, 2009 | 122,748,500 | $ | 12,275 | $ | 192,758 | $ | (1,088,743 | ) | $ | (883,710 | ) | |||||||||
| Issuance of common stock - cash | 3,925,000 | 393 | 253,608 | - | 254,000 | |||||||||||||||
| Issuance of common stock - prior subscriptions | 1,346,000 | 135 | 134,465 | - | 134,600 | |||||||||||||||
| Issuance of common stock - services | 650,000 | 65 | 37,435 | - | 37,500 | |||||||||||||||
| Issuance of common stock – drawdown equity agreement | 10,000,000 | 1,000 | - | - | 1,000 | |||||||||||||||
| Issuance of common stock - past consideration | 3,063,500 | 306 | 272,294 | - | 272,600 | |||||||||||||||
| Issuance of common stock – accrued officers salaries /expenses | 92,829,209 | 9,283 | 919,009 | - | 928,292 | |||||||||||||||
| Write-off of consulting agreement - prior fees | - | - | 185,000 | - | 185,000 | |||||||||||||||
| Comprehensive income (loss) | - | - | - | (1,172,730 | ) | (1,172,730 | ) | |||||||||||||
| Balance, June 30, 2010 | 234,562,209 | $ | 23,456 | $ | 1,994,569 | $ | (2,261,473 | ) | $ | (243,448 | ) | |||||||||
The accompanying notes should be read in conjunction with the financial statements.
38
SMART KIDS GROUP, INC.
(A Development Stage Company)
Statements of Cash Flows
| For the period | ||||||||||||
| For the | For the | February 11, 2003 | ||||||||||
| year ended | year ended | (Inception) to | ||||||||||
| June 30, 2010 | June 30, 2009 | June 30, 2010 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Comprehensive income (loss) | $ | (1,172,730 | ) | $ | (579,479 | ) | $ | (2,261,473 | ) | |||
| Adjustments to reconcile net income to cash | ||||||||||||
| (used in) operating activities | ||||||||||||
| Issuance of common stock - services | 37,500 | - | 37,500 | |||||||||
| Issuance of common stock - equity line of credit | 1,000 | - | 1,000 | |||||||||
| Issuance of common stock - past consideration | 272,600 | - | 272,600 | |||||||||
| Issuance of common stock – accrued officers salaries /expenses | 928,292 | - | 928,292 | |||||||||
| Write-off of consulting agreement - prior fees | 185,000 | - | 185,000 | |||||||||
| Depreciation and amortization | 227 | 227 | 9,142 | |||||||||
| (Increase) decrease in | ||||||||||||
| Prepaid expenses | 10,000 | - | - | |||||||||
| Organizational costs | - | - | (8,575 | ) | ||||||||
| Subscriptions receivable | 100 | - | - | |||||||||
| Increase (decrease) in | ||||||||||||
| Accounts payable, trade | (157,858 | ) | 191,328 | 175,181 | ||||||||
| Due to related parties | (775,685 | ) | 415,445 | 475,558 | ||||||||
| Cash flows (used in) provided by operating activities | (671,554 | ) | 27,521 | (185,775 | ) | |||||||
| Cash flows from investing activities | ||||||||||||
| Software/website development costs | 417,588 | (36,429 | ) | (406,612 | ) | |||||||
| Purchase of equipment | - | - | (1,134 | ) | ||||||||
| Cash flows (used in) investing activities | 417,588 | (36,429 | ) | (407,746 | ) | |||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from the issuance of stock | 254,000 | - | 459,033 | |||||||||
| Proceeds from stock subscriptions | - | - | 134,600 | |||||||||
| Cash flows provided by financing activities | 254,000 | - | 593,633 | |||||||||
| Net increase (decrease) in cash | 34 | (8,908 | ) | 112 | ||||||||
| Cash and cash equivalents, beginning of period | 78 | 8,986 | - | |||||||||
| Cash and cash equivalents, end of period | $ | 112 | $ | 78 | $ | 112 | ||||||
The accompanying notes should be read in conjunction with the financial statements.
39
SMART KIDS GROUP, INC.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2010
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Smart Kids Group, Inc. (“the Company’) was formed on February 11, 2003 under the laws of the State of Florida. The Company licenses technology and develops educational content and software.
As of June 30, 2010, the Company was a development stage company. A development stage enterprise is a company that is devoting substantially all of its efforts to establishing a new business and either planned principal operations have not commenced or planned principal operations have commenced but there has been no significant revenue. From February 11, 2003 (date of inception) through June 30, 2010, the Company did not realize any revenue.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (US GAAP) for financial information and in accordance with professional standards promulgated by the Public Company Accounting Oversight Board (PCAOB). They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the years ended June 30, 2010 and 2009, respectively along with the period February 11, 2003 (date of inception) to June 30, 2010.
Reclassifications
Certain amounts in the accompanying financial statements as of June 30, 2009 have been reclassified by the Company to conform to the June 30, 2010 presentation. These reclassifications had no effect on the previously reported net loss.
Use of Estimates
The preparation of financial information in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial information and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on the differences between financial reporting basis and tax basis of the assets and liabilities and are measured using enacted tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized, when it is more likely than not, that such tax benefits will not be realized.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, software development costs, accounts payable and accrued expenses approximates fair value.
40
Revenue and Cost Recognition
The Company recognizes revenue using the accrual method of accounting wherein revenue is recognized when earned and expenses and costs are recognized when incurred. Since inception of the business on February 11, 2003 through June 30, 2010, the Company has not realized any revenue.
Software Development Costs
The Company accounts for its software development costs for its products in accordance with Statement of Position no. 98 issued by the AICPA in March 1998.
Effective June 30, 2010, the Company’s management assessed the total costs to date of $882,200 and made an adjustment in the amount of $475,588 due to delays in securing revenue from the current projects.
As of June 30, 2010 and June 30, 2009, the Company capitalized $406,612 and $824,200 for the costs incurred to-date. Management of the Company intends to amortize these costs over their estimated useful life when the Company realizes revenue.
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately ninety accounting topics, and displays all topics using a consistent structure. Contents in each topic are further organized first by subtopic, then section and finally paragraph. The paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the topic, subtopic, section and paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).
In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 –Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC.
ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position or results of operations but will change the referencing system for accounting standards.
As of June 30, 2010, all citations to the various SFAS’ have been eliminated and will be replaced with FASB ASC as suggested by the FASB in future interim and annual financial statements.
The Company does not expect any of the recently issued accounting pronouncements to have a material impact on its financial condition or results of operations.
NOTE 2. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of June 30, 2010 and June 30, 2009, the Company incurred accounts payable of $175,181and $333,039, respectively. The accounts payable primarily consist of consulting fees, audit and legal fees as an SEC reporting company and operating expenses.
NOTE 3. RELATED PARTY TRANSACTIONS
Due to Related Parties
As of June 30, 2010 and June 30, 2009, the Company incurred amounts due to related parties of $475,558 and $1,251,243 respectively. The due to related parties consists of the payments due under employment agreements to the officers of the Company along with the related United States employment taxes, the license agreement and unreimbursed operating expenses incurred by the majority shareholder. The advances for unreimbursed operating expenses do not bear interest or any specific repayment terms.
41
| June 30, 2010 | June 30, 2009 | |||||||
| Employment contracts - officers | $ | 475,558 | $ | 1,078,918 | ||||
| Licensing agreement | - | 154,211 | ||||||
| Unreimbursed expenses | - | 18,114 | ||||||
| Total due to related parties | $ | 475,558 | $ | 1,251,243 | ||||
Effective January 1, 2010, the Company’s Board of Directors passed a resolution for the Company to no longer accrue any officers’ salaries, and license fees until further notice. The Company issued 92,829,209 restricted common of the stock in exchange for the outstanding and accrued officers’ salaries and licensing fees as of December 31, 2009 in the amount $928,292 at a per share price of $.01.
Office Rent
The Company shares office space at the residence of the Chairman of the Board, President, and Chief Development Officer located in Edmonton, Canada at no cost. For the years ended June 30, 2010 and 2009, the rent expense was zero.
NOTE 4. DEPOSITS FROM STOCK SUBSCRIPTIONS
Prior to June 30, 2009, the Company received $134,600 in total cash consideration for deposits on stock subscriptions for the purchase of 1,346,000 shares of the Company’s restricted common stock at a purchase price of $0.10 per common share. During the year ended June 30, 2010, the Company issued 1,346,000 of common stock in consideration of these stock subscriptions.
NOTE 5. AGREEMENTS
Employment Agreements
For the years ended June 30, 2010 and 2009, officers’ salaries were $151,196 and $308,400, respectively, including the applicable United States employment taxes.
Licensing Agreement – Smart Kids International Holdings, Inc.
All intellectual property including the trademarks and work product that the Company currently works with are under an exclusive sublicense agreement with Smart Kids International Holdings, Inc., (“SKIH”) who leases all of the intellectual property from Mr. Shergold, the Company’s Chairman of the Board, President and Chief Development Officer. The agreement was effective June 20, 2005, at an annual fee of $60,000.
SKIH shall have the right at its sole discretion to terminate the license agreement in the event that the Company becomes insolvent, commits an act of bankruptcy, abandons the license as deemed by the failure to pursue the active business as intended by the license, assigns the license without written consent, fails to observe or perform any of the provisions of the license, or experiences a change in control that is not approved by SKIH, such approval not to be unreasonably withheld, prior to such change in control occurring.
For the year ended June 30, 2010 and 2009, the licensing fees related to this agreement were $30,000 and $60,000, respectively. This licensing agreement was the subject of the Board of Directors’ resolution to no longer accrue licensing fees for this agreement until further notice. On June 25, 2010, 18,421,000 restricted common of the stock in exchange for the outstanding and accrued licensing fees as of December 31, 2009 in the amount $184,211 at a per share price of $.01.
42
Consulting Agreements
Effective June 8, 2006, the Company entered into an advisory agreement which requires a monthly payment of $5,000. These costs are being reflected in the legal and professional expenses in the accompanying financial statements.
The parties to this agreement agreed to the $5,000 to accrue starting in August 2009, the month in which the Company Registration Statement on Form S-1 was effective with SEC. 50% of this liability is payable in cash and 50% is payable in common stock of the Company.
As of June 30, 2010, the management of the Company adjusted the prior amount due of $185,000 under this agreement through additional paid in capital. For the year ended June 30, 2010 and 2009, the consulting expense related to this agreement was $55,000 and zero, respectively.
NOTE 6. INCOME TAXES
As of June 30, 2010, the Company had federal and state net operating loss carryforwards of approximately $1,785,915 which expire in 2030. Utilization of these loss carryforwards may be limited by certain federal statutory provisions, including cumulative changes in ownership interests in excess of 50% over a three-year period.
Future tax benefits related to temporary differences relate to the following as of June 30, 2010:
| Gross deferred tax assets: | ||||
| Net operating losses | $ | (2,261,473 | ) | |
| Accrued officers compensation | 475,558 | |||
| Total gross deferred tax assets | (1,785,915 | ) | ||
| Less - valuation allowance | 1,785,915 | |||
| Net deferred tax assets | $ | - | ||
The Company’s effective tax rate differed from the federal statutory rate due to deferred state tax assets and the Company’s full valuation allowance, the latter of which reduced the Company’s effective tax rate to zero. Because the Company has not yet achieved profitable operations, management believes the potential tax benefits as of June 30, 2010 did not satisfy the realization criteria and accordingly has recorded a valuation allowance for the entire gross tax asset.
NOTE 7. STOCKHOLDERS’ EQUITY
As of June 30, 2010 and June 30, 2009, the Company was authorized to issue 400,000,000 shares of common stock of which 234,562,209 and 122,748,500 common shares were issued and outstanding, respectively.
Year ended June 30, 2010
| Balance of outstanding common shares - June 30, 2009 | 122,748,500 | |||
| Issuance of common stock – cash (1) | 3,925,000 | |||
| Issuance of common stock - prior subscriptions (2) | 1,346,000 | |||
| Issuance of common stock - services (3) | 650,000 | |||
| Issuance of common stock - drawdown equity agreement (4) | 10,000,000 | |||
| Issuance of common stock - past consideration (5) | 3,063,500 | |||
| Issuance of common stock - accrued officers salaries /expenses (6) | 92,829,209 | |||
| Total common shares issued | 111,813,709 | |||
| Balance of outstanding common shares - June 30, 2010 | 234,562,209 |
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| 1) | 3,925,000 shares of Common Stock of the Company were issued for $254,000 of cash consideration at an average per share price of $0.06. |
| 2) | 1,346,000 shares of Common Stock of the Company were issued for $134,600 in stock subscribed to prior to June 30, 2009 at an average per share price of $0.10. This $134,600 was reflected on the balance sheet as of June 30, 2009 as a current liability until the shares were issued in the year ended June 30, 2010. |
| 3) | 650,000 shares of Common Stock of the Company were issued for $37,500 for services rendered on behalf of the Company during the year ended June 30, 2010 at an average per share price of $0.06. |
| 4) | On June 25, 2010, 10,000,000 shares of Common Stock of the Company were issued under a drawdown equity financing agreement and registration rights agreement. On March 18, 2010, Smart Kids Group, Inc. (the “Company”), a Florida corporation (OTCBB: SKGP) (the “Company”) , entered into a drawdown equity financing agreement and registration rights agreement (collectively the “Agreements”) with Auctus Private Equity Fund, LLC (“Auctus”).\ |
In accordance with the Agreements, Auctus has committed, subject to certain conditions, to purchase up to $10 million of the Company’s Common stock, par value $0.0001, over a term of up to two years. Although the Company is not mandated to sell shares under the Agreements, the Agreements give the Company the option to sell to Auctus shares of Common Stock at a per share purchase price of equal to 95% of the lowest closing bid price during the five trading days following the Company’s delivery of notice to Auctus (the “Notice”). At its option, the Company may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The maximum amount of Common Stock that the Company can sell pursuant to any Notice is the greater of: (i) an amount of shares with an aggregate maximum purchase price of $250,000 or (ii) 200% of the average daily trading volume based on 20 days preceding the drawdown notice date.
Auctus is not required to purchase the shares, unless the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the Federal securities laws, including the Securities Act of 1933, as amended. The Company is obligated to file with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 within 90 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing.
| 5) | 3,063,500 shares of Common Stock of the Company were issued for $272,600 for past consideration at an average per share price of $0.09. |
| 6) | On June 25, 2010, the Company issued 92,829,209 shares of restricted common stock of the Company in lieu of cash payment for $928,292 of accrued salaries and license fees at a per share price of $.01 These restricted common shares are subject to lock-up agreements. On August 6, 2009, the Company issued 1,346,000 shares of restricted common stock of the Company to investors for total cash consideration of $134,600, which as of June 30, 2009, were classified as deposits from stock subscriptions in the accompanying financial statements. |
Year ended June 30, 2009
During the year ended June 30, 2009, the Company did not issue any shares of common stock.
NOTE 8. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of cash. As of June 30, 2010, the Company maintained its cash accounts with financial institutions located in the United States and Canada. Historically, the Company has not experienced any losses on its deposits.
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NOTE 9. LIQUIDITY AND CAPITAL RESOURCES – GOING CONCERN
The accompanying financial statements have been prepared on a going-concern basis, which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business.
As reflected in the accompanying financial statements, the Company experienced a net loss of $1,172,730 and $579,479 or the years ended June 30, 2010 and June 30, 2009, respectively, along with an accumulated deficit during the Company’s development stage of $2,261,473 as of June 30, 2010.
On August 14, 2009, the United States Securities and Exchange Commission issued the Company a Notice of Effectiveness for the Form S-1; Registration under the Securities Act of 1933. The Company registered 20,198,500 common shares of the Company.
During the year ended June 30, 2010, the Company realized net proceeds of $254,000 from the sale of common stock of the Company.
Between its inception on February 11, 2003 and June 30, 2010, the Company realized net proceeds of $593,633 from the sale of common stock of the Company.
Management believes that additional capital will be required to fund operations through the year ended June 30, 2010 and beyond, as it attempts to generate increasing revenue, and develops new products. Management intends to raise capital through additional equity offerings. There can be no assurance that the Company will be successful in obtaining financing at the level needed or on terms acceptable to the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company’s operations are subject to certain additional risks and uncertainties including, among others, dependence on outside suppliers and manufacturers, competition, dependence on its exclusive license and relationship with the licensor, uncertainties regarding patents and proprietary rights, dependence on key personnel, and other business risks. In addition, there is no assurance, assuming the Company is successful in raising additional capital that the Company will be successful in achieving profitability or positive cash flow.
NOTE 10. SUBSEQUENT EVENTS
Effective September 9, 2010, the Company and 3D Future Vision, Inc., a Florida corporation ("3DFV”), entered into a License Agreement on an exclusive basis for a term of twenty five (25) years. Pursuant to the License Agreement, 3DFV grants certain rights under its proprietary intellectual property related to the Gina D Brand Library® intellectual property inventory (“Licensed IP”) to the Company to make, have made, import, use, offer for sale, promote, distribute, sell products and processes, and otherwise commercially exploit the Licensed IP in all fields and any manner as deemed necessary in the sole discretion of the Company.
In consideration for the execution of the License Agreement and for the exclusivity of the license, SKGP has agreed to pay a one-time fee of $263,008 to the owners of 3DFV, Mr. Joseph DiFrancesco and his spouse Bernadette, and issue an amount of shares of SKGP common stock to 3DFV equivalent to render 3DFV’s percentage of stock ownership in the Company equal to that of Mr. Richard Shergold, the Company’s President and Co-Chairman. This issuance to 3DFV will amount to approximately 200,000,000 shares of the Company’s common stock. In addition, 3DFV’s President, Mr. Joseph DiFrancesco, was appointed as the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Pursuant to the License Agreement, Mr. DiFrancesco has also been granted the right to appoint an additional board member in his sole and absolute discretion.
As of October 14, 2010, the date the financial statements were available to be issued, there are no other subsequent events that are required to be recorded or disclosed in the accompanying financial statements as of and for the year ended June 30, 2010.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9AT. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer, Principal Executive Officer, Mr. Joseph DiFrancesco, and our President, Principal Financial Officer, and Principal Accounting Officer Mr. Richard Shergold, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of a date (the "Evaluation Date") within ninety (90) days prior to the filing of our June 30, 2010 Form 10-K.
Based upon that evaluation, our Management has concluded that, as of June 30, 2010, our disclosure controls and procedures were not effective in timely alerting management to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic filings with the SEC.
Our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures had the following material weaknesses:
| · | We were unable to maintain any segregation of duties within our financial operations due to our reliance on limited personnel in the finance function. While this control deficiency did not result in any audit adjustments to our 2007 through 2010 interim or annual financial statements, it could have resulted in a material misstatement that might have been prevented or detected by a segregation of duties. |
| · | The Company’s current internal accounting staff located in Edmonton, Alberta, Canada is outsourced to a local Canadian accounting firm, which is small and has limited resources by industry standards, and the Company’s resources are limited given its size; |
| · | The Company lacks sufficient resources to perform the internal audit function and does not have an Audit Committee; |
| · | We do not have an independent Board of Directors, nor do we have a board member designated as an independent financial expert for the Company. The Board of Directors is comprised of three (3) members of management. As a result, there may be lack of independent oversight of the management team, lack of independent review of our operating and financial results, and lack of independent review of disclosures made by the Company; and |
| · | Documentation of all proper accounting procedures is not yet complete. |
To the extent reasonably possible given our limited resources, we intend to take measures to cure the aforementioned material weaknesses, including, but not limited to, the following:
| · | Considering the engagement of consultants to assist in ensuring that accounting policies and procedures are consistent across the organization and that we have adequate control over financial statement disclosures; |
| · | Hiring additional qualified financial personnel including a Chief Financial Officer on a full-time basis; |
| · | Expanding our current board of directors to include additional independent individuals willing to perform directorial functions; and |
| · | Increasing our workforce in preparation for exiting the development stage and commencing revenue producing operations. |
Since the recited remedial actions will require that we hire or engage additional personnel, these material weaknesses may not be overcome in the near term due to our limited financial resources. Until such remedial actions can be realized, we will continue to rely on the advice of outside professionals and consultants.
We anticipate that these initiatives will be at least partially, if not fully, implemented by December 31, 2010, subject to our ability to obtain sufficient future financing and subject to our ability to produce revenue in the short term.
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Internal Control over Financial Reporting
(a) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed 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.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our management, with the participation of its CEO and President, assessed the effectiveness of our internal control over financial reporting as of June 30, 2010. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of The Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment under such criteria, management concluded that our internal controls over financial reporting were not effective as of June 30, 2010 due to control deficiencies that constituted material weaknesses.
Management in assessing its internal controls and procedures for fiscal 2010 identified a lack of sufficient segregation of duties, particularly in cash disbursements. Specifically, this material weakness is such that the design of controls over the area of cash disbursements relies primarily on detective controls and could be strengthened by adding preventative controls to properly safeguard company assets.
Management has also identified a lack of sufficient personnel in the accounting function due to the limited resources of the Company with appropriate skills, training and experience to perform the review processes to ensure the complete and proper application of generally accepted accounting principles.
We are in the process of developing and implementing remediation plans to address our material weaknesses.
Management has identified specific remedial actions to address the material weaknesses described above:
| · | Improve the effectiveness of the accounting group by augmenting our existing resources with additional consultants or employees to improve segregation procedures and to assist in the analysis and recording of complex accounting transactions and preparation of tax disclosures. We plan to mitigate the segregation of duties issues by hiring additional personnel in the accounting department once we have achieved positive cash flow from operations, and/or have raised significant additional working capital. |
| · | Improve segregation procedures by strengthening cross approval of various functions including cash disbursements and quarterly internal audit procedures where appropriate. |
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in Controls and Procedures
There were no significant changes made in our internal controls over financial reporting during the year ended June 30, 2010 that have materially affected or are reasonably likely to materially affect these controls. Thus, no corrective actions with regard to significant deficiencies or material weaknesses were necessary.
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. We were not required to have, nor have we, engaged our independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Commission that permit us to provide only management’s report in this annual report.
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None
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the respective names, ages and positions of our directors and executive officers as well as the year that each of them commenced serving as a director with SKGP. The terms of all of the directors, as identified below, will run until our annual meeting of stockholders in 2011.
| Person and Position: | Age: | SKGP Director Since: | ||
Richard Shergold — President, Chief Development Officer and Co-Chairman (Principal Financial Officer) | 47 | 2003 | ||
Joseph DiFrancesco — Chief Executive Officer and Co-Chairman (Principal Executive Officer) | 68 | 2010 | ||
Lisa Yakiwchuk — Chief Operating Officer, Administrative Officer, Secretary and Director | 42 | 2003 | ||
Michael Gibilisco — Director | 39 | 2010 |
Management and Director Biographies
Richard Shergold
Chief Development Officer and Chairman
| - | 1992 – 2001 - Be Alert Bert – Founder, Producer/Creator/Marketer of 54 TV series shows |
| - | 2000 – Present – Genuine Publishing - Self Employment, develop software for online fitness training |
| - | 2003 – Present – Smart Kids Group Inc. – Founder, CEO (until 2009), CDO (2009 – present) and Chairman |
| - | 2003 – Present – Smart Kids International Holdings – CEO and Chairman |
In 1991, Mr. Shergold created the Be Alert Bert series. From 2004 to 2009, Mr. Shergold served as the CEO, Chief Creative Officer and Chairman of Smart Kids Group Inc. Presently, Mr. Shergold is the Chief Development Officer and Chairman of the Board. Prior to creating Be Alert Bert, Mr. Shergold owned a chain of Martial Arts schools in Canada and the U.S.
Mr. Shergold has created, produced and marketed television series, a fitness programs, software and related websites. In addition, to Be Alert Bert, Mr. Shergold created, produced and stars in Full Motion Fitness and 3-D Fitness Trainer, an exercise program.
Since 2003, Mr. Shergold serves as the CEO and Director under Smart Kids International Holdings, the holding company for Smart Kids intellectual property.
Mr. Shergold is solely responsible for production of all of the Company’s sublicensed intellectual property, including the Be Alert Bert series. He created each idea from inception, developed the characters, wrote the scripts, wrote the music, developed the storylines, and directed and produced the productions. As stated earlier in this report, the source of all of our intellectual property is our founder, Richard Shergold who created all content.
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Joseph DiFrancesco
Chief Executive Officer and Co-Chairman
Mr. Joseph DiFrancesco is the founder, Chairman, CEO, and President of 3D Future Vision, Inc. Through his efforts, 3DFV has created Gina D's Kids Club® programs that have won a Telly Award, a Kids First Award, a Communicator Award and a Crystal Award for Excellence in Creativity, Special Effects and Animation. The show has also been approved by Kids First and the Coalition for Quality Children's Media. The entire series of television DVDs have received a 5 star review and been awarded the Dove Foundation Family Seal of Approval. In addition, the Safety, Health and Fitness television DVD has been awarded the 2007 Greatest Products Award from iParenting Media which is owned by Disney.
For the past seven years, he and his wife, 3DFV Co-Executive Producer Bernadette DiFrancesco, were responsible for creating the idea, the characters, the music and the production of the Gina D Brand Library which is owned exclusively by 3D Future Vision, Inc. that includes: 31 half-hour episodes of Gina D's Kids Club®, 13 half-hour episodes of Sing Along With Gina D, 13 half-hour episodes of Gina's Pre-School Musical-The Series Narrated By Casey Kasem , over 300 written and recorded original songs and music videos and a 90 minute made for television movie called Gina D's Pre-School Musical narrated by Casey Kasem. On September 9, 2010, Smart Kids Group, Inc. and 3D Future Vision, Inc. entered into an exclusive license agreement for the licensing of the Gina D Brand Library® for a term of 25 years.
On September 9, 2010, concurrent with and pursuant to the execution of the License Agreement, Mr. Joseph DiFrancesco was elected as a director of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Mr. Joseph DiFrancesco was appointed by the Board of Directors to serve as the Company’s Chief Executive Officer.
Lisa Yakiwchuk
Director of Operations, Administrative Officer, Secretary and Director
| - | 2003 – Present – Smart Kids Group Inc. - Administrative Officer, Secretary and Director |
| - | 2003 – Present – Smart Kids International Holdings – Corporate Secretary/Director |
| - | 2003 – Present – TKS Administration Services – Self-employed |
| - | 2004 – Present – Alberta Children and Youth Services – Executive Division |
Ms. Yakiwchuk has been in the executive administration field for over 24 years. Ms. Yakiwchuk has served over 18 years in public provincial government administration. As a previous Supervisor of Administration, she oversaw 11 employees in the social services sector, working with child welfare, children with disabilities and foster homes.
On September 9, 2010, concurrent with and pursuant to the execution of the License Agreement, Ms. Lisa Yakiwchuk was appointed by the Board of Directors to serve as the Company’s Chief Operating Officer. Ms. Yakiwchuk also serves as the Company’s Secretary and director.
Michael Gibilisco
Director
Mr. Michael Gibilisco is President of MG Studios and the Creator and developer of a provisional patent 3D digital processing technology and also has worked with Mr. Joseph DiFrancesco for the last 9 years as Director of the Gina D's Kids Club programs that air in over 95% of the worlds markets. Mike has 15 years experience in the Film, Video and Animation industry. His credits include producing and directing television shows for numerous clients, such as, Nickelodeon, Disney and Universal Studios with airings on a variety of networks such as PBS, ABC, WB, FOX, TBN, CBS, NBC, TNN, MTV, BET, satellite dish networks and affiliate networks. Michael Gibilisco is also a consultant for a number of companies for his experience in marketing and syndication efforts for a variety of projects. Michael Gibilisco formed his own company; MG Studios back in 1997 and since has grown to work with major motion picture and television studios producing quality programs. His personal involvement includes managing and overseeing the development and creation of projects along with pre production, production and post-production. Michael Gibilisco background includes producing and directing animated series, children's television show series along with music videos, commercials, infomercials, public service announcements, and a television series. Michael Gibilisco has received The Communicator's and Aurora awards for directing, special effects and animation along with being nominated for an Emmy. Michael's company, MG Studios is a state of the art fully digital studio located in Longwood, Florida with capabilities to produce, edit, animate, motion capturing, create special effects, compose music, composite, CD-ROM and DVD authoring, along with web design and much more. MG Studios specializes in the creation and complete media packaging for the television and film industry. Recently, Michael Gibilisco has ventured into the 3D Stereoscopic and Auto-Stereoscopic arena. With his experience in the film and video industry and being involved with the technical aspects of the industry, he created his own process and software to view image/video/film with and without the use of 3D glasses.
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On September 9, 2010, pursuant to and concurrent with the execution of the License Agreement, Mr. Michael Gibilisco was elected as a director of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Mr. Gibilisco was recommended to the majority shareholders for election to the Board of Directors by Mr. Joseph DiFrancesco pursuant to the License Agreement.
Family Relationships amongst Directors and Officers:
Richard Shergold, the President, Chief Development Officer and Chairman of the Company, and Lisa Yakiwchuk, the Director of Operations, Administrative Officer, Secretary and Director of the Company, are cousins. Other than the foregoing, there are no family relationships between the officers and directors of the Company.
Involvement in Certain Legal Proceedings
None of the executive officers of the Company (i) has been involved as a general partner or executive officer of any business which has filed a bankruptcy petition; (ii) has been convicted in any criminal proceeding nor is subject to any pending criminal proceeding; (iii) has been subjected to any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (iv) has been found by a court, the United States Securities and Exchange Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law.
Information Concerning Non-Director Executive Officers
We currently have no executive officers serving who are non-directors.
Compliance with Section 16(A) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors and persons who own more than 10% of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (hereinafter referred to as the "Commission") initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership, of Common Stock and other equity securities of the Company on Forms 3, 4, and 5, respectively. Executive officers, directors and greater than 10% shareholders are required by Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, all of the Company's executive officers, directors and greater than 10% beneficial owners of its Common Stock have complied with Section 16(a) filing requirements applicable to them during the Company's most recent fiscal year.
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Item 11. Executive Compensation
The following table sets forth certain compensation information for: (i) each person who served as the chief executive officer of our company at any time during the year ended June 30, 2009, regardless of compensation level, and (ii) each of our other executive officers, other than the chief executive officer, serving as an executive officer at any time during 2009. The foregoing persons are collectively referred to herein as the “Named Executive Officers.” Compensation information is shown for fiscal years 2010 and 2009.
Name/Principal Position | Year | Salary | Bonus | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Nonqualified Deferred Compensation Earnings | All Other Compensation | Total | |||||||||||||||||||||||||
| Richard Shergold | ||||||||||||||||||||||||||||||||||
| President, Chief Development Officer | 2010 | $ | 50,000 | (3) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 50,000 | ||||||||||||||||
| and Co-Chairman, Principal Financial/Accounting Officer | 2009 | $ | 100,000 | (3) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 100,000 | ||||||||||||||||
| Paul Andrew Ruppanner | ||||||||||||||||||||||||||||||||||
| Former President, CEO and Principal Executive and Financial/Accounting Officer and Director | 2010 | $ | 50,000 | (3) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 50,000 | ||||||||||||||||
| 2009 | $ | 100,000 | (3) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 100,000 | |||||||||||||||||
| Lisa Yakiwchuk | ||||||||||||||||||||||||||||||||||
| Director of Operations, Administrative Officer, Secretary and Director | 2010 | $ | 60,000 | (3) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 60,000 | ||||||||||||||||
| 2009 | $ | 60,000 | (3) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 60,000 | |||||||||||||||||
| Joseph DiFrancesco | ||||||||||||||||||||||||||||||||||
Chief Executive Officer, Co-Chairman Principal Executive Officer | 2010 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 60,000 | |||||||||||||||||
| 2009 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
| (1) | Reimbursement for office and administration expenses. |
| (2) | Reimbursement for travel expenses. |
| (3) | Salaries have not been paid. No compensation has been paid to our officers or directors since our inception in 2003. For the year ended June 30, 2010, we incurred $151,196 in accrued compensation, consisting of payments due under employment agreements along with the related employment taxes, consulting agreements and operating expenses. Such expenses have been booked as accrued expenses on the Company’s balance sheet. |
No stock options have been granted to the Company’s officers and directors and none are issued or outstanding.
Employment Agreements
Mr. Shergold:
Effective August 1, 2005, the Company entered into an employment agreement with Mr. Shergold at an annual salary as of $100,000, payable in equal monthly installments. The employment agreement provides that Mr. Shergold’s base salary will escalate to $120,000 per year when the business cash flow permits and with the approval to the Board of Directors. Mr. Shergold’s base salary is subject to annual review by the Board of the Directors of the Company on or about each January 1st thereafter as long as the employment agreement is in effect. There are no additional payments due to Mr. Shergold for work performed prior to the date of the employment agreement. Pursuant to the employment agreement, the Company provides Mr. Shergold $1,000 a month to cover general personal operating expenses and to reimburse Mr. Shergold for other documented and itemized business expenses for all reasonable travel, entertainment and other expenses in excess of the prior $1,000 consistent with expense reimbursement policies adopted by the Board of Directors of the Company. The Company has determined that 100% of Mr. Shergold’s time is spent on software development and the related costs are being capitalized in accordance with Statement of Position #98 issued by the American Institute of Certified Public Accountants in March 1998. The term of Mr. Shergold’s employment agreement is indefinite and may be terminated by the Company for Cause (as defined in the employment agreement) or by Mr. Shergold upon 30 days prior written notice or in the event of Mr. Shergold’s death or permanent disability.
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Ms. Yakiwchuk:
Effective December 31, 2007, the Company entered into an employment agreement with Lisa Yakiwchuk, the Director of Operations, Administrative Officer and Secretary of the Company. She is to receive annual compensation of $120,000. The Company intends to accrue this amount along with the other payments required under the other employment agreements and the advisory agreement. The Company has determined that 100% of the Secretary time is spent on corporate and administrative matters and all costs are expensed in the current period as incurred.
On June 25, 2010, the Company issued 92,829,209 restricted common stock in exchange for the outstanding and accrued officers’ salaries and licensing fees as of December 31, 2009 in the amount $928,292 at a per share price of $.01. Effective January 1, 2010, the Company’s Board of Directors passed a resolution for the Company to no longer accrue any officers’ salaries, and license fees until further notice.
Significant Employees
We have no significant employees other than our executive officers and directors named in this report. We conduct our business through agreements with consultants and arms-length third parties.
Committees of the Board of Directors
Our audit committee presently consists of our directors. Our board does not have compensation, governance, nominating or executive committees or any other committees. Our entire board serves in such capacities until their respective successors are elected and qualified.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions in that our officers and directors serves in all the above capacities.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Name and Address of Beneficial Holder | Title | Shares of Common Stock | Percentage of Common Stock (1) | |||||
Richard Shergold 9768-170 Street, Suite 234, Edmonton, Alberta T5T5L4 | President, Chief Creative Officer and Co-Chairman (Principal Financial Officer and Accounting Officer) | 156,949,209 | (2) | 44.22 | % | |||
Paul Andrew Ruppanner 44 Coyote Mountain Rd. Santa Fe, New Mexico 87505 | Former Chief Executive Officer, President and Director | 10,000,000 | (3) | 2.82 | % | |||
Joseph DiFrancesco Tree Fork Lane, Suite 109, Longwood, Florida 32746 | Chief Executive Officer and Co-Chairman (Principal Executive Officer) | 100,000,000 | (4) | 28.18 | % | |||
Lisa Yakiwchuk 18012-73 Avenue Edmonton, Alberta T5T3K3 | Chief Operating Officer, Secretary and Director | 26,780,000 | 7.55 | % | ||||
Michael Gibilisco Tree Fork Lane, Suite 109, Longwood, Florida 32746 | Director | 0 | — | |||||
| All executive officers and directors as a group (5 persons) | — | 288,329,209 | 81.24 | % | ||||
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Notes:
| (1) | Applicable percentage of ownership is based on 354,917,209 shares of common stock issued and outstanding as of October 14, 2010. Pursuant to Rule 13d-3 promulgated under the Exchange Act, any securities not outstanding which are subject to warrants, rights or conversion privileges exercisable within 60 days are deemed to be outstanding for purposes of computing the percentage of outstanding securities of the class owned by such person but are not deemed to be outstanding for the purposes of computing the percentage of any other person. |
| (2) | Mr. Shergold beneficially owns 156,949,209 shares of common stock. 135,645,400 shares are held in his name. 2,882,709 shares are held by Genuine Publishing, a business entity owned by Mr. Richard and of which Mr. Shergold maintains voting and dispositive control. 18,421,100 shares are held by Smart Kids International Holdings, Inc., a business entity owned by Mr. Richard and of which Mr. Shergold maintains voting and dispositive control. |
| (3) | Denotes Shares held by the Ruppanner Family Trust of which Paul Andrew Ruppanner has voting and dispositive control. Mr. Ruppanner no longer serves as an officer, director or employee of the Company. |
| (4) | These shares are held in the name of 3D Future Vision, Inc., a Florida corporation which is 100% jointly owned by Mr. Joseph DiFrancesco, our Chief Executive Officer, and his spouse, Bernadette DiFrancesco as husband and wife with the right of survivorship. This 100,000,000 shares of restricted common stock does not include approximately another 100,000,000 shares of restricted common stock that is subject to be issued in accordance with the Exclusive License Agreement with 3D Future Vision, Inc. when the Company files the requisite documents with the SEC in order to increase the authorized number of common shares. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
All of the trademarks and work product that the Company currently works with is under an exclusive sublicense agreement with SKIH who licenses such Intellectual Property from Richard Shergold, the owner of all of the Intellectual Property for $5,000 per month plus royalties fees as described above.
Due to Related Parties
As of June 30, 2010 and 2009, the Company incurred $475,558 and $1,251,243 respectively. The due to related parties consists of the payments due under employment agreements along with the related United States employment taxes and license agreements and unreimbursed operating expenses incurred by the majority shareholder. The advances for unreimbursed operating expenses do not bear interest or any specific repayment terms.
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| June 30, 2010 | June 30, 2009 | |||||||
| Employment contracts | $ | 475,558 | $ | 1,078,918 | ||||
| Licensing agreement | - | 154,211 | ||||||
| Unreimbursed expenses | - | 18,114 | ||||||
| Total due to related parties | $ | 475,558 | $ | 1,251,243 | ||||
Richard Shergold Exclusive Licensing Agreement
Mr. Richard Shergold, our Company’s Chief Development Officer and Chairman, is the sole Officer, Director and Shareholder of Smart Kids International Holdings, Inc. (“SKIH”). Pursuant to a licensing agreement dated June 20, 2005, Mr. Shergold licensed all of the intellectual property assets owned by Mr. Shergold to SKIH for a period of 25 years, subject to renewal and extension in perpetuity to be agreed upon by the parties at that later date. In a separate Sub-Licensing Agreement between the Company and SKIH, SKIH granted a sublicense of the above-mentioned intellectual property assets to the Company on an exclusive basis. Pursuant to the terms of the Sublicense Agreement, the Company agreed to pay SKIH a licensing fee of $5,000 per month, where the Company received a world-wide exclusive royalty-free license to use the intellectual property assets in connection with the manufacture, distribution, sale and advertising of the intellectual property for the term of the Sublicense Agreement.
The initial term of the Sublicense Agreement is 25 years and SKIH has the right to extend the Sublicense Agreement to SKGP in perpetuity. In the event SKIH extends the Sublicense Agreement in perpetuity, the licensing fee shall remain $5,000 per month. As of June 30, 2010, the Company has paid SKIH licensing fees of $80,789, and accrued $265,000 in monies owed to SKIH pursuant to this Sublicense Agreement. Effective January 1, 2010, this licensing agreement was the subject of the Board of Directors’ resolution to no longer accrue licensing fees for this agreement until further notice. On June 25, 2010, 18,421,000 restricted common of the stock in exchange for the outstanding and accrued licensing fees as of December 31, 2009 in the amount $184,211 at a per share price of $.01.
3D Future Vision, Inc. Exclusive Licensing Agreement
Effective September 9, 2010, SKGP and 3D Future Vision, Inc., a Florida corporation ("3DFV”) which is wholly owned by our CEO, Mr. DiFrancesco with his spouse, Bernadette DiFrancesco, entered into a License Agreement (the “License Agreement”) on an exclusive basis for a term of twenty five (25) years. Pursuant to the License Agreement, 3DFV grants certain rights under its proprietary intellectual property related to the Gina D Brand Library® intellectual property inventory (“Licensed IP”) to SKGP to make, have made, import, use, offer for sale, promote, distribute, sell products and processes, and otherwise commercially exploit the Licensed IP in all fields and any manner as deemed necessary in the sole discretion of the Company.
In consideration for the execution of the License Agreement and for the exclusivity of the license, SKGP has agreed to pay a one-time fee of $263,008 to the owners of 3DFV, Mr. Joseph DiFrancesco and his spouse Bernadette, and issue an amount of shares of SKGP common stock to 3DFV equivalent to render 3DFV’s percentage of stock ownership in the Company equal to that of Mr. Richard Shergold, the Company’s President and Chairman, who currently owns 156,949,209 shares (44.22%). This issuance to 3DFV will amount to approximately 156,949,209 shares of the Company’s common stock. In addition, 3DFV’s President, Mr. Joseph DiFrancesco, has been appointed as the SKGP’s Chief Executive Officer and Co-Chairman of the Board of Directors pursuant to a written consent of the majority shareholders of the Company in lieu of a meeting of shareholders. Pursuant to the License Agreement, Mr. DiFrancesco has also been granted the right to appoint an additional board member in his sole and absolute discretion.
There are no material relationships between the Company or its affiliates and any of the parties to the License Agreement, other than with respect to the License Agreement.
The exclusive license gives SKGP worldwide rights and creates a working partnership with 3D Future Vision in an effort to create a revenue stream by marketing and selling DVD's, CD's, toys, and other ancillary products derived from the Gina D Brand Library® of television programs valued at $7,500,000. In addition, the license allows SKGP to sell 2D to 3D conversions of content and sell 3D digital displays to generate advertising revenues.
Office Rent
The Company shares office space at the residence of the Co-Chairman of the Board, President and Chief Development Officer located in Edmonton, Canada at no cost. In addition, the Company shares office space at the residence of the Chief Executive Officer and Co-Chairman of the Board of the Company in Longwood, Florida at no cost.
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For the years ended June 30, 2010 and 2009, the rent expense was zero.
Director Independence
The OTCBB on which we plan to have our shares of common stock quoted does not have any director independence requirements. In determining whether our directors are independent, we refer to NASDAQ Stock Market Rule 4200(a)(15). Based on those widely-accepted criteria, we have determined that our Directors are not independent at this time.
No member of management is or will be required by us to work on a full time basis, although our president currently devotes fulltime to us. Accordingly, certain conflicts of interest may arise between us and our officer(s) and director(s) in that they may have other business interests in the future to which they devote their attention, and they may be expected to continue to do so although management time must also be devoted to our business. As a result, conflicts of interest may arise that can be resolved only through their exercise of such judgment as is consistent with each officer's understanding of his/her fiduciary duties to us.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.
Because none of our directors are independent directors, we do not currently have independent audit or compensation committees. As a result, these directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.
Item 14. Principal Accountant Fees and Services
(1) Audit Fees
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for our audit of annual financial statements and review of financial statements included in our quarterly reports or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were:
| 2010 | $ | 60,000 | Conner & Associates, P.C. | ||
| 2009 | $ | 47,500 | Conner & Associates, P.C. |
(2) Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported in the preceding paragraph:
| 2010 | $ | 0 | Conner & Associates, P.C. | |||
| 2009 | $ | 0 | Conner & Associates, P.C. |
(3) Tax Fees
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were:
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| 2010 | $ | 10,000 | Conner & Associates, P.C. | |||
| 2009 | $ | 0 | Conner & Associates, P.C. |
(4) All Other Fees
The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2), and (3) was:
| 2010 | $ | 0 | Conner & Associates, P.C. | |||
| 2009 | $ | 0 | Conner & Associates, P.C. |
The percentage of hours expended on the principal accountant’s engagement to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full time, permanent employees was 0%.
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PART IV.
Item 15. Exhibits and Reports on Form 8-K
Index to Exhibits
| Exhibit | Description | |
| 31.1 | Certification of the Company’s Principal Executive Officer pursuant to 15d-15(e), under the Securities and Exchange Act of 1934, as amended, with respect to the registrant’s Annual Report on Form 10-K for the year ended June 30, 2010. | |
| 31.2 | Certification of the Company’s Principal Financial Officer and Principal Accounting Officer pursuant to 15d-15(e), under the Securities and Exchange Act of 1934, as amended, with respect to the registrant’s Annual Report on Form 10-K for the year ended June 30, 2010. | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer). | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer and Principal Accounting Officer). |
| (b) | Reports on Form 8-K. None |
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Pursuant to the requirements of Section 13 or 15(d) 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.
| Date: October 14, 2010 | By: /s/ JOSEPH DIFRANCESCO | |
Name: Joseph DiFrancesco Title: Chief Executive Officer and Co-Chairman (Principal Executive Officer) |
| By: /s/ RICHARD SHERGOLD | ||
Name: Richard Shergold Title: President, Chief Development Officer and Co-Chairman (Principal Financial and Principal Accounting Officer) |
| Signature | Title | Date | ||
| /s/ JOSEPH DIFRANCESCO | Chief Executive Officer and Co-Chairman of the Board (Principal Executive Officer) | October 14, 2010 | ||
| Joseph DiFrancesco | ||||
| /s/ RICHARD SHERGOLD | President, Chief Development Officer and Co-Chairman of the Board (Principal Financial and Principal Accounting Officer) | October 14, 2010 | ||
| Richard Shergold | ||||
| /s/ LISA YAKIWCHUK | Chief Operating Officer, Administrative Officer, Secretary and Director | October 14, 2010 | ||
| Lisa Yakiwchuk | ||||
| /s/ MICHAEL GIBILISCO | Director | October 14, 2010 | ||
| Michael Gibilisco |
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