SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 24, 2010
ENTER CORP.
(Exact name of registrant as specified in its charter)
Delaware | 333-164000 | 30-0457914 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (I.R.S. Employer Identification Number) |
460 Brogdon Road, Suite 400
Suwanee, GA 30024
(Address of principal executive offices) (zip code)
(678) 762-1100
(Registrant's telephone number, including area code)
Marc Ross, Esq.
David B. Manno
Sichenzia Ross Friedman Ference LLP
61 Broadway
New York, New York 10006
Phone: (212) 930-9700
Fax: (212) 930-9725
9 Hayarden Street
Moshav Yashresh
D.N. Emek Sorek
Israel, 76838
(Former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Item 1.01 Entry into a Material Definitive Agreement
On November 24, 2010, Enter Corp. (“Enter” or the “Company”) entered into a Share Exchange Agreement (the “Exchange Agreement”), with Brainy Acquisitions, Inc. (“Brainy Acquisitions”) and the shareholders of Brainy Acquisitions. Pursuant to the Exchange Agreement, which closed on November 24, 2010 (the “Closing Date”), the Company issued 2,499,998 shares of the Company’s common stock to the shareholders of Brainy Acquisitions (the “Acquisition Shares”), representing approximately 57.3% of the Company’s aggregate issued and outstanding common stock following the closing of the Exchange Agreement, in exchange for all of the issued and outstanding capital stock of Brainy Acquisitions.
On November 24, 2010, the Company entered into a subscription agreement (the “Subscription Agreement”) with accredited investors (the “Investors”), pursuant to which the Company agreed to issue and sell convertible promissory notes (the “Notes”) in the aggregate principal amount of up to $3,000,000 (the “Private Placement”). The Notes will be secured by all of the assets of the Company. The Notes will be convertible into common stock of the Company at an exercise price of $0.40 per share, subject to adjustment in the event of stock splits, stock dividends (except for a 7.5-to-1 forward stock split in the form of a stock dividend) effectuated not later than 180 days following the closing of the Private Placement), or in the event of certain subsequent issuances by the Company of co mmon stock or securities convertible into common stock at a lower price. The Notes will mature two years from the date of issuance and bear interest at the rate of 10% per annum due and payable semi-annually in arrears commencing March 31, 2011 and upon maturity. Pursuant to the Private Placement, the Company also agreed to issue to the Investors 10 Class A Warrants and 10 Class B Warrants (collectively, the “Warrants”) to purchase common stock for each $4.00 principal amount of Notes, such that the Company agreed to issue an aggregate of 7,500,000 Class A Warrants and 7,500,000 Class B Warrants. The Warrants will have a five-year term, may be exercised on a cashless basis, and have an exercise price of $0.60 (with respect to the Class A Warrants) or $1.20 (with respect to the Class B Warrants), subject to adjustment in the event of stock splits, stock dividends (except for a 7.5-to-1 forward stock split in the form of a stock dividend) effectuated not later than 180 days following the closing of the Private Placement), or in the event of certain subsequent issuances of the Company of common stock or securities convertible into common stock at a lower price. The Notes may not be converted, and the Warrants may not be exercised, to the extent such conversion or exercise would cause the holder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of the Company’s then outstanding shares of common stock following such conversion or exercise. Pursuant to the Subscription Agreement, the Company agreed to file a registration statement registering the shares of common stock underlying the Notes and Warrants, subject to Securities and Exchange Commission (“SEC”) limitations, upon written request therefor from holders of more than 50% of the principal amount of the Notes, if received within two years from the Closing Date. The Company’s obligations under the Notes are guaranteed by Brainy Acquisitions. The closing of the Private Placement is subject to certain conditions including the closing of the Exchange Agreement and the filing of this Current Report on Form 8-K.
The Company may accept on one occasion within fourteen days after the initial closing of the Private Placement additional principal amount for up to a total of $3,000,000 (inclusive of the principal amount upon which the initial closing occurs) and issue Notes and Warrants on the same terms and conditions as the Private Placement (an “Additional Closing”). A condition of such Additional Closing shall be the deposit by the Company at the Additional Closing and retention by the Escrow Agent pursuant to Section 3.1(b) of the Escrow Agreement of thirty percent (30%) of all principal amount in excess of $2,400,000 of aggregate Principal Amount, which sum shall be employed and released for the same purposes and in the same manner as the other funds described in Section 3.1(b) of the Escrow Agreement.
Pursuant to an escrow agreement entered into between the Company, the Investors, and Grushko & Mittman, P.C., as escrow agent, $900,000 from the sale of the Notes will continue to be held in escrow following the closing of the Private Placement in a non-interest bearing account and released to the Company or on the Company’s behalf not more frequently than one time each ten days. A request for release must be made in writing to the Escrow Agent and Collateral Agent. The request must include a copy of unanimously adopted resolutions of the board of directors of the Company certified by the secretary of the Company and the Company’s chief financial officer that (i) the Company is requesting a release of funds and the details thereof including the amount, purposes, and wire delivery instructions, (ii) t hat such requested funds are for reimbursement of funds which were timely employed in conformity in all material respects with the use of proceeds set forth on Schedule 9(e) to the Subscription Agreement under the heading “Use of Proceeds to be Reimbursed After Closing”, and (iii) an Event of Default, or an event that with the giving of notice or the passage of time could become an Event of Default, has not occurred. The Company must provide to Collateral Agent reasonably satisfactory proof that the funds for which reimbursement is sought had been used for the purposes described in part (ii) of the previous sentence. The Escrow Agent may not release any funds if an objection to such release has been made by Collateral Agent. Deviations from Schedule 9(e) to the Subscription Agreement may be made subject to the written approval of the Collateral Agent. Schedule 9(e) contemplates that $900,000 will be used for public relations and investor relations servi ces rendered by a direct marketing firm under the Company’s direction to implement and manage a direct mail correspondence program. The Company believes that this program will be beneficial for its business and keeping its shareholders apprised of its progress. Unless postponed by the Company and Collateral Agent, any funds retained in escrow on the nine month anniversary of the Closing Date will be released to Subscribers requesting such release in proportion to the relative amount of Note principal held by all Subscribers as of such nine month anniversary date. Upon release to the Subscribers, such sums shall be applied against amounts outstanding on the Notes in the manner set forth in the Notes.
In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
In connection with the Exchange Agreement, in addition to the foregoing:
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(i) Effective on the Closing Date, Itzhak Ayalon and Nahman Morgenstern resigned as the sole officers and directors of the Company and the following individuals were appointed as executive officers and directors of the Company:
Name | Title | |
John P. Benfield | Chief Executive Officer, Director | |
Dennis Fedoruk | Chief Creative Officer, President, Chairman | |
Ronda Bush | Chief Operations Officer | |
Tony Erwin | Director | |
Derek Schwerzler | Director |
(ii) On November 24, 2010, the Company entered into separation agreements with Itzhak Ayalon and Nahman Morgenstern, pursuant to which the Company purchased from Mr. Ayalon and Mr. Morgenstern an aggregate of 5,400,000 of the Company’s common stock, for a purchase price of $100,000.
(iii) The Company intends to effect a 7.5-to-1 forward stock split, in the form of a stock dividend, as soon as practicable.
(iv) The Company intends to changes its name to The Brainy Brands Company, Inc. or a similar derivation, as soon as practicable.
Item 2.01 Completion of Acquisition or Disposition of Assets
Information in response to this Item 2.01 is keyed to the Item numbers of Form 10.
Item 1. Description of Business
Effective on the Closing Date, pursuant to the Share Exchange Agreement, Brainy Acquisitions became a wholly owned subsidiary of the Company. The acquisition of Brainy Acquisitions is treated as a reverse acquisition, and the business of Brainy Acquisitions became the business of the Company. At the time of the reverse acquisition, Enter was not engaged in any active business.
References to “we,” “us,” “our” and similar words refer to the Company, its subsidiary, Brainy Acquisitions, and (prior to September 23, 2010) to The Brainy Baby Company, LLC, a Georgia limited liability company whose assets were acquired by Brainy Acquisitions on September 23, 2010. References to “Enter” refer to the Company and its business prior to the reverse acquisition.
Summary
Brainy Acquisitions is a Georgia corporation organized on August 27, 2010. Enter is a Delaware corporation organized on November 21, 2007.
On September 23, 2010, Brainy Acquisitions acquired all of the assets of The Brainy Baby Company, LLC (“Brainy Baby”). Brainy Baby is a Georgia limited liability company formed on July 30, 2001. Prior to its acquisition of the assets of Brainy Baby, Brainy Acquisitions did not have any significant assets or operations. We produce children’s educational videos, toys, books, games and puzzles aimed at early development for preschoolers.
Our executive offices are located at 460 Brogdon Road, Suite 400, Suwanee, GA 30024 and our telephone number at such address is 678-762-1100.
RISK FACTORS
An investment in the Company’s common stock involves a high degree of risk. In determining whether to purchase the Company’s common stock, an investor should carefully consider all of the material risks described below, together with the other information contained in this report before making a decision to purchase the Company’s securities. An investor should only purchase the Company’s securities if he or she can afford to suffer the loss of his or her entire investment.
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Risks Related to our Business
We have a limited operating history upon which an evaluation of our prospects can be made.
We have had only limited operations since our inception (Brainy Baby was organized on July 30, 2001 and Brainy Acquisitions was organized on August 27, 2010 ) upon which to evaluate our business prospects. As a result, investors do not have access to the same type of information in assessing their proposed investment as would be available to purchasers in a company with a history of prior substantial operations. We face all the risks inherent in an early stage business, including the expenses, lack of adequate capital and other resources, difficulties, complications and delays frequently encountered in connection with conducting operations, including capital requirements and management’s potential underestimation of initial and ongoing costs. We also face the risk that we may not be able to effectively implement our business plan. If we are not effective in addressing these risks, we will not operate profitably and we may not have adequate working capital to meet our obligations as they become due.
We may be unable to successfully execute any of our identified business opportunities or other business opportunities that we determine to pursue.
We currently have a limited corporate infrastructure. In order to pursue business opportunities, we will need to continue to build our infrastructure and operational capabilities. Our ability to do any of these successfully could be affected by any one or more of the following factors:
· | our ability to raise substantial additional capital to fund the implementation of our business plan; |
· | our ability to execute our business strategy; |
· | the ability of our products to achieve market acceptance; |
· | our ability to manage the expansion of our operations and any acquisitions we may make, which could result in increased costs; |
· | our ability to attract and retain qualified personnel; |
· | our ability to manage our third party relationships effectively; and |
· | our ability to accurately predict and respond to the rapid changes in our industry and the evolving demands of the markets we serve. |
Our failure to adequately address any one or more of the above factors could have a significant impact on our ability to implement our business plan with respect to marketing and selling early childhood products and our ability to pursue other opportunities that arise.
We may not be able to effectively control and manage our proposed growth business plan, which would negatively impact our operations.
If our business and markets grow and develop, of which there are no assurances, it will be necessary for us to finance and manage expansion in an orderly fashion. We may face challenges in managing expanding product offerings and in integrating any acquired businesses with our own. Such eventualities will increase demands on our existing management, workforce and facilities. Failure to satisfy increased demands could interrupt or adversely affect our operations and cause administrative inefficiencies.
Our business depends on the development of strong brands, and if we do not develop and enhance our brands, our ability to attract and retain customers may be impaired and our business and operating results may be harmed.
We believe that our “Brainy Baby” brand and extensions thereof will be a critical part of our business. Developing and enhancing these brands may require us to make substantial investments with no assurance that these investments will be successful. If we fail to promote and develop our brands, or if we incur significant expenses (or significantly greater expenses than allocable) in this effort, our business, prospects, operating results and financial condition will be harmed. We anticipate that developing, maintaining and enhancing our brands will become increasingly important, difficult and expensive.
We operate in an industry where consumer preferences can change drastically from year to year. Unlike a subscription or other recurring revenue model, we depend on our ability to correctly identify changing consumer sentiments well in advance and supply new products that respond to such changes on a timely basis. Consumer preferences, and particularly children’s preferences, are continually changing and are difficult to predict. Since our products typically have a long development cycle, in some cases lasting many years, it can be difficult to predict correctly changing consumer preferences and technology, entertainment and education trends. To remain competitive, we must continue to develop new technologies and products and enhance existing technologies and product lines, as well as successfully integrate third-party technology with our own. We cannot be sure that any new products or services will be widely accepted and purchased by consumers, and if new products are not as successful as we expect, our business and operating results will be adversely affected.
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Economic declines have had a material adverse effect on our sales, and a slow recovery could prevent us from achieving our financial goals.
We rely heavily on sales to retailers during the third and fourth quarters of each year to achieve our overall sales goals. Also, we rely on strong consumer sales in these periods to prevent build- up of retail inventory. We cannot predict the extent to which economic conditions will change and many economists predict that the economic decline will be prolonged, that any recovery may be weak, and that conditions may deteriorate further before there is any improvement or even after some improvement has occurred. Continuing weak economic conditions in the United States or abroad as a result of the current global economic downturn, lower consumer spending (especially discretionary items), lower consumer confidence, continued high or higher levels of unemployment, higher inflation or even deflation, higher commodity prices, such as the price of oil, political conditions, natural disaster, labor strikes or other factors could negatively impact our sales or ability to achieve profitability.
We depend on our suppliers for our components, and our production or operating margins would be harmed if these suppliers are not able to meet our demand and alternative sources are not available.
Some of the components used to make our products currently come from single suppliers. If our suppliers are unable to meet our demand for our components and if we are unable to obtain an alternative source or if the price available from our current suppliers or an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our products would be seriously harmed and our operating results would suffer. In addition, as we do not have long-term agreements with our major suppliers and cannot guarantee their stability, they may stop manufacturing our components at any time, with little or no notice. If we are required to use alternative sources, we may be required to redesign some aspects of the affected products, which may involve delays and additional expense. If there are any significant interruptions in the supply of components, we may be unable to manufacture sufficient quantities of our finished products or we may be unable to manufacture them at targeted cost levels, and our business and operating results could be harmed.
We rely on a limited number of manufacturers, many of which are located in China, to produce our finished products, and our reputation and operating results could be harmed if they fail to produce quality products in a timely and cost-effective manner and in sufficient quantities.
We outsource substantially all of our finished goods assembly, using several Asian manufacturers, most of which manufacture our products at facilities in the Guangdong province in the southeastern region of China. We depend on these manufacturers to produce sufficient volumes of our finished products in a timely fashion, at satisfactory quality and cost levels and in accordance with our and our customers’ terms of engagement. If our manufacturers fail to produce quality finished products on time, at expected cost targets and in sufficient quantities, or if any of our products are found to be tainted or otherwise raise health or safety concerns, our reputation and operating results would suffer.
If we do not maintain sufficient inventory levels or if we are unable to deliver our products to our customers in sufficient quantities, or on a timely basis, or if retail inventory levels are too high, our operating results will be adversely affected.
If we fail to meet tight shipping schedules, we could damage our relationships with retailers, increase our shipping costs or cause sales opportunities to be delayed or lost. In order to be able to deliver our merchandise on a timely basis, we need to maintain adequate inventory levels of the desired products. If our inventory forecasting and production planning processes result in our maintaining manufacturing inventory in excess of the levels demanded by our customers, we could be required to record inventory write-downs for excess and obsolete inventory, which would adversely affect our operating results. If the inventory of our products held by retailers is too high, they may not place or may reduce orders for additional products, which would unfavorably impact our future sales and adversely affect our operating results.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
Our intellectual property rights are important assets for us. We have registered a trademark for “Brainy Baby” and certain derivations thereon in the United States and internationally. Various events outside of our control pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in every country in which our products are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operatin g results.
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We may be unable to protect our intellectual property from infringement by third parties.
Our business plan is significantly dependent upon exploiting our intellectual property. There can be no assurance that we will be able to control all of the rights for all of our intellectual property. We may not have the resources necessary to assert infringement claims against third parties who may infringe upon our intellectual property rights. Litigation can be costly and time consuming and divert the attention and resources of management and key personnel.
In providing our products we could infringe on the intellectual property rights of others, which may cause us to engage in costly litigation and, if we do not prevail, could also cause us to pay substantial damages and prohibit us from selling our services.
Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages, if it is ultimately determined that our services infringe a third party’s proprietary rights. Even if claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns.
Any errors or defects contained in our products, or our failure to comply with applicable safety standards, could result in recalls, delayed shipments and rejection of our products and damage to our reputation, and could expose us to regulatory or other legal action.
Our products may contain errors or defects that are discovered after commercial shipments have begun, which could result in the rejection of our products by our retailers, damage to our reputation, lost sales, diverted development resources and increased customer service and support costs and warranty claims. Individuals could sustain injuries from our products, and we may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage. Moreover, we may be unable to retain adequate liability insurance in the future.
Concerns about potential public harm and liability may involve involuntary recalls or lead us to voluntarily recall selected products. Recalls or post-manufacture repairs of our products could harm our reputation and our competitive position, increase our costs or reduce our net sales. Costs related to unexpected defects include the costs of writing down the value of our inventory of defective products and providing product replacement, as well as the cost of defending against litigation related to the defective products. Further, as a result of recent recalls and safety issues related to products of a number of manufacturers in the toy industry, some of our retailer customers have been increasing their testing requirements of the products we ship to them. These additional requirements may result in delayed or cancelled shipments, increa sed logistics and quality assurance costs, or both, which could adversely affect our operations and financial results. In addition, recalls or post-manufacturing repairs by other companies in our industry could affect consumer behavior and cause reduced purchases of our products and increase our quality assurance costs in allaying consumer concerns.
System failures in our web-based services or store could harm our business.
The Internet-based aspects of our business have grown substantially in strategic importance to our overall business. However, we still have limited experience operating an e-commerce system and providing web services in connection with our products. Any failure to provide a positive user experience could have a negative impact on our reputation, sales and consumer relationships. If demand for accessing our websites exceeds the capacity we have planned to handle peak periods or if other technical issues arise when customers attempt to use these systems to purchase products or to access features or content for our increasing number of web-connected products, then customers could be inconvenienced or become dissatisfied with our products. Any significant disruption to our website or internal computer systems or malfunctions related to tr ansaction processing on our e-commerce store or content management systems could result in a loss of potential or existing customers and sales. Any significant system failures in our web-based services or store could have a significant adverse effect on our sales and operating plan.
Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning is not sufficient for all eventualities. Our systems are also subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our hosting facilities could result in lengthy interruptions in our services. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions i n our service as a result of system failures. Any unplanned disruption of our systems could result in adverse financial impact to our operations.
If we are unable to compete effectively with existing or new competitors, our sales and market share could decline.
We currently compete primarily in the learning toy and electronic learning aids category of the U.S. toy industry. We also compete in the U.S. supplemental educational materials market. Each of these markets is very competitive and we expect competition to increase in the future. Many of our direct, indirect and potential competitors have significantly longer operating histories, greater brand recognition and substantially greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly than we can to changes in consumer requirements or preferences or to new or emerging technologies, and may be able to use their economies of scale to produce products more cheaply. Further, with greater economies of scale and more distribution channels, they may be successful even if they sell at a lower margin. Our larger competitors may also be able to devote substantially greater resources, including personnel, spending and facilities to the development, promotion and sale of their products than we do. We cannot assure you that we will be able to compete effectively in our markets.
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Retailer liquidity problems could harm our financial results.
If retailers encounter liquidity problems due to weak sales or their inability to raise sufficient capital because of credit constraints, we may not be able to collect the accounts receivable we generate based on the orders we fulfill. In 2008 and 2009, there were a number of bankruptcies among prominent retailers. Where retailers file for bankruptcy protection, we are likely to collect less money than we are owed, and may collect nothing, particularly when the retailer had significant secured debt ahead of our claims. If any of our retailers suspend or reduce payments to us or file for bankruptcy protection, the resulting bad debt expense we would incur would have an adverse effect on our results of operations. In addition to collection risk, we may decide not to accept orders from troubled retailers, which would further reduce sales.
We are subject to international, federal, state and local laws and regulations that could impose additional costs or changes on the conduct of our business.
We operate in a highly regulated environment with international, federal, state and local governmental entities regulating many aspects of our business, including products and the importation of products. Regulations with which we must comply include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws and revised tax law interpretations), trade restrictions, regulations regarding financial matters, environmental regulations, advertising directed toward children, safety and other administrative and regulatory restrictions. Compliance with these and other laws and regulations could impose additional costs on the conduct of our business. While we take steps that we believe are necessary to comply with these laws and regulations, there can be no assurance that we have achieved compli ance or that we will be in compliance in the future. Failure to comply with the relevant regulations could result in monetary liabilities and other sanctions, which could have a negative impact on our business, financial condition and results of operations. In addition, changes in laws or regulations may lead to increased costs, changes in our effective tax rate, or the interruption of normal business operations that would negatively impact our financial condition and results of operations.
We are subject to the Consumer Product Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act, or CPSIA, the Federal Hazardous Substances Act, the Flammable Fabrics Act, regulation by the Consumer Product Safety Commission, or CPSC, and other similar federal, state and international rules and regulatory authorities, some of which have conflicting standards and requirements. Our products could be subject to involuntary recalls and other actions by these authorities. We may also have to write off inventory and allow our customers to return products they purchased from us. In addition, any failures to comply could lead to significant negative media attention and consumer dissatisfaction, which could harm our sales and lead to widespread rejection of our products, particularly since we rely so heavily on the integri ty of our brand.
Natural disasters, armed hostilities, terrorism, labor strikes or public health issues could have a material adverse effect on our business.
Armed hostilities, terrorism, natural disasters, or public health issues, such as the recent outbreak of H1N1 flu, whether in the United States or abroad could cause damage and disruption to our company, our suppliers, our manufacturers, or our customers or could create political or economic instability, any of which could have a material adverse impact on our business. Although it is impossible to predict the consequences of any such events, they could result in a decrease in demand for our product or create delay or inefficiencies in our supply chain by making it difficult or impossible for us to deliver products to our customers, or for our manufacturers to deliver products to us, or suppliers to provide component parts.
We rely on key personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.
Our success depends in large part upon the abilities and continued service of our executive officers and other key employees, particularly John Benfield, our chief executive officer, Dennis Fedoruk, our chief creative officer, and Ronda Bush, our vice president operations. There can be no assurance that we will be able to retain the services of such officers and employees. Our failure to retain the services of our key personnel could have a material adverse effect on the Company. In order to support our projected growth, we will be required to effectively recruit, hire, train and retain additional qualified management personnel. Our inability to attract and retain the necessary personnel could have a material adverse effect on the Company. We have no “key man” insurance on any of our key employees.
One customer accounts for approximately 15% of our sales, and the loss of this customer would substantially impact our operations.
Our largest customer, Bayview Entertainment, LLC, accounts for approximately 15% of our sales. This subjects us to significant financial and other risks in the operation of our business if a major customer were to terminate or materially reduce, for any reason, its business relationship with us.
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Risks Related to the Company’s Common Stock
There is not an active liquid trading market for the Company’s common stock.
The Company files reports under the Securities Exchange Act of 1934, as amended, and its common stock is eligible for quotation on the OTC Bulletin Board. However, there is no regular active trading market in the Company’s common stock, and we cannot give an assurance that an active trading market will develop. If an active market for the Company’s common stock develops, there is a significant risk that the Company’s stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:
· | variations in our quarterly operating results; |
· | announcements that our revenue or income are below analysts’ expectations; |
· | general economic slowdowns; |
· | sales of large blocks of the Company’s common stock; |
· | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; and |
· | fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of early stage technology companies. |
The ownership of our common stock is highly concentrated in our officers and directors.
Our executive officers and directors will beneficially own approximately 2,269,999 shares of our outstanding common stock (52.1%). As a result, they have the ability to exercise control over our business by, among other items, their voting power with respect to the election of directors and all other matters requiring action by stockholders. Such concentration of share ownership may have the effect of discouraging, delaying or preventing, among other items, a change in control of the Company.
The Company’s common stock will be subject to the “penny stock” rules of the SEC, which may make it more difficult for stockholders to sell the Company’s common 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 receive 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 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. |
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 regulations applicable to penny stocks may severely affect the market liquidity for the Company’s common stock and could limit an investor’s ability to sell the Company’s common stock in the secondary market.
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As an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward-looking statements does not apply to the Company.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
The Company has not paid dividends in the past and does not expect to pay dividends in the foreseeable future. Any return on investment may be limited to the value of the Company’s common stock.
No cash dividends have been paid on the Company’s common stock. We expect that any income received from operations will be devoted to our future operations and growth. The Company does not expect to pay cash dividends in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as the Company’s board of directors may consider relevant. If the Company does not pay dividends, the Company’s common stock may be less valuable because a return on an investor’s investment will only occur if the Company’s stock price appreciates.
Because our common stock is not registered under the Exchange Act, we will not be subject to the federal proxy rules and our directors, executive offices and 10% beneficial holders will not be subject to Section 16 of the Exchange Act. In addition, our reporting obligations under Section 15(d) of the Exchange Act may be suspended automatically if we have fewer than 300 shareholders of record on the first day of our fiscal year.
Our common stock is not registered under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and we do not intend to register our common stock under the Exchange Act for the foreseeable future (provided that, we will register our common stock under the Exchange Act if we have, after the last day of our fiscal year, more than 500 shareholders of record, in accordance with Section 12(g) of the Exchange Act). As a result, although we are be required to file annual, quarterly, and current reports pursuant to Section 15(d) of the Exchange Act as long as our common stock is not registered under the Exchange Act, we will not be subject to Section 14 of the Exchange Act, which, among other things, prohibits companies that have securities registered under the Exchange Act from soliciting proxies or consents from shar eholders without furnishing to shareholders and filing with the Securities and Exchange Commission (“SEC”) a proxy statement and form of proxy complying with the proxy rules. In addition, so long as our common stock is not registered under the Exchange Act, our directors and executive officers and beneficial holders of 10% or more of our outstanding common stock will not be subject to Section 16 of the Exchange Act. Section 16(a) of the Exchange Act requires executive officers and directors, and persons who beneficially own more than 10% of a registered class of equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of common shares and other equity securities, on Forms 3, 4 and 5 respectively. Such information about our directors, executive officers, and beneficial holders will only be available through this report, any registration statement, and periodic reports we file hereafter. Fu rthermore, so long as our common stock is not registered under the Exchange Act, our obligation to file reports under Section 15(d) of the Exchange Act will be automatically suspended if, on the first day of any fiscal year (other than a fiscal year in which a registration statement under the Securities Act has gone effective), we have fewer than 300 shareholders of record. This suspension is automatic and does not require any filing with the SEC. In such an event, we may cease providing periodic reports and current or periodic information, including operational and financial information, may not be available with respect to our results of operations.
Our issuance of common stock upon conversion of debentures and exercise of warrants may depress the price of our common stock.
As of November 24, 2010, we have 4,359,998 shares of common stock issued and outstanding. Pursuant to the Private Placement, we have agreed to issue convertible debentures in the principal amount of up to $3,000,000 convertible into 7,500,000 shares of common stock and warrants to purchase 15,000,000 shares of common stock. The issuance of shares of common stock upon conversion of convertible debentures and exercise of outstanding warrants could result in substantial dilution to our stockholders, which may have a negative effect on the price of our common stock.
FORWARD-LOOKING STATEMENTS
Statements in this current report on Form 8-K may be “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks d iscussed from time to time in this prospectus, including the risks described under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this current report and in other documents which we file with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this current report.
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BUSINESS
Background
Brainy Acquisitions, Inc. (“Brainy Acquisitions”) is a Georgia corporation organized on August 27, 2010. On September 23, 2010, Brainy Acquisitions acquired all of the assets of The Brainy Baby Company, LLC (“Brainy Baby”). Brainy Baby is a Georgia limited liability company formed on July 30, 2001. Prior to its acquisition of the assets of Brainy Baby, Brainy Acquisitions did not have any significant assets or operations. Brainy Acquisitions acquired the assets of Brainy Baby for a purchase price of $82,500, pursuant to an agreement for the purchase and sale of assets of The Brainy Baby Company, LLC, dated September 23, 2010, between Brainy Acquisitions and Asset Recovery Associates, LLC as assignee for the creditors of The Brainy Baby Company, LLC. Brainy Baby assigned its assets to Asset Recovery Asso ciates, LLC, pursuant to a Deed of Assignment, on September 21, 2010.
References to “we,” “us,” “our” and similar words refer to the Company, its subsidiary, Brainy Acquisitions, and (prior to September 23, 2010) to The Brainy Baby Company, LLC, a Georgia limited liability company whose assets were acquired by Brainy Acquisitions on September 23, 2010. References to “Enter” refer to the Company and its business prior to the reverse acquisition.
We sell over 200 education and entertainment products aimed at children ages 9 months to 5 years including DVD’s, CD’s, books, toys, games, puzzles, and flash cards.
With a global operation and sales through an international network of licensees in 60 countries, licensed broadcasting in 110 countries, distribution channels in China, Asia and Europe, our goal is to become a market leader in preschool education and early childhood development products.
Company History
Brainy Baby branded products have a nine year history of being sold in the US and internationally. Currently, the Brainy Baby brand has been licensed for products including: books, flashcards, toys, games and plush. Television broadcasts of Brainy Baby episode segments first appeared in 3rd Quarter 2005, via Comcast for the US.
Our Products
We develop, market, license, and sell products for children ages 9 months to 5 years, including DVD’s, books, toys, and games with a focus on making education fun. Our products are designed to be stimulating, entertaining and engaging for even the youngest of children and are meant to be shared between parent and child.
Our Brainy Baby DVDs are comprehensive audio/visual programs that introduce logical and creative concepts to the youngest viewers and basics like ABC's, animals and art to preschoolers. The Bilingual Baby series expose young children to different languages like Spanish, French, Greek, German, Italian, Japanese, Russian, Portuguese, Dutch, Swedish and Hebrew. Complimentary products such as books, flashcards and toys are designed to reinforce the concepts introduced in the DVD series.
Viewed in millions of homes both domestically and internationally, our programs are broadcast in all major US markets. They are the most commonly requested "baby space" content on video on demand (VOD). In addition, our Brainy Baby DVD's are seen via broadcast in more than 110 other countries.
Distribution Method
The Company develops certain of its products, in particular its DVD’s and CD’s, while other products sold by the Company, such as books and flashcards, are developed jointly with the manufacturer. The Company purchases the products it sells from the products’ manufacturers and sells the products to distributors, retailers, and directly to consumers through the Company’s website. The Company also licenses DVD’s and CD’s it develops and earns a royalty on sales by the licensee. Such licensing currently accounts for less than 10% of sales.
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Go to Market Strategy
Our strategy is to support our existing line of high quality educational toys, media, and activities and develop new product and offerings optimizing new technologies, delivery systems, and advances in early childhood education, such as the following:.
o | Web based Products |
o | Mobile based Product |
o | Entertainment Content and Programming |
o | DVD’s |
o | Books, Games, Puzzles, FlashCards |
o | Toys specifically designed to support our educational development platform |
We will seek to capitalize on recognition of our brand by focusing our energies in the Direct To Consumer Marketing space in addition to strengthening our initiatives in “Big Box” as well as Toy Specialty channel “brick & mortar” retail channels. The Company will accelerate its current licensing activities, specifically:
Direct To Consumer Sales and Marketing :
o | Direct TV/ Infomercial Marketing |
o | Online marketing and e-commerce |
o | Mobile/ Smart Phone Apps (Applications) |
Retail / Brick & Mortar Specialized Sales Initiatives
o | Big Box (i.e. Walmart, Target et.al.) |
o | Medium Size /Smaller Specialty (i.e. Toys R Us, and Local Toy Shops) |
o | Mall/ Kiosk Channel |
Licensing / Domestic & International
o | Content licensing |
o | Brand Licensing |
o | Product Licensing |
Brainy Baby's DVD and CD content is licensed for localization, duplication and sale in many countries around the globe. Licensees localize or translate the language tracks, applicable video scenes and the DVD cover wraps into the language of the territory. Through the efforts of our licensees, Brainy Baby is now available in: French, German, Spanish, (Mexican, Castilian and Catalan dialects) German, Italian, Greek, Turkish and Korean which are also available for sale here in the U.S.
Market Analysis Summary
There are now three major retail markets: the Mass Market (Wal-Mart, Target, Costco, etc.) the Specialty Market (high end retail stores, department store chains, privately owned toy stores, book stores which sell products not normally found in the Mass Market) and the direct-to-consumer markets or DTC.
Fueling sales growth in children’s education and entertainment products are four primary groups: 1) new parents who have a high interest in seeing that their children receive an early learning advantage, 2) the parents of toddlers that seek a few guilt free moments of quiet for themselves, 3) parents of children with learning disabilities such as dyslexia and autism, who find their children are positively and profoundly impacted by Brainy Baby DVD’s, and 4) grandparents who often outspend parents.
Children's education and entertainment products are one of the fastest growing segments of the $4.8 billion children's video and DVD market of which the non-theatrical segment is $1.3 billion annually. The toy industry is an additional $22.5 billion market. In the last five years, major companies and independent production companies have recognized the potential of the Infant and Preschool Education/Entertainment market. The number of DVD titles, computer games, electronic toys, animated characters and television programs, which provide preschoolers with educational content, are growing at an unprecedented rate.
The preschool market is expected to continue to grow through year 2025 and beyond, as more than 4.3 million new babies born annually in the United States.
According to the U.S. Bureau of the Census, there are an estimated 27.9 million children under 11 years of age in 2010. In addition, there are an estimated 4.3 million babies born each year into an environment where parents spend significant amount of time, money and attention seeking out educational tools to provide the best learning tools for their children. We believe that the trends towards fewer children per household and growth in disposable income will lead to more money being spent on products which parents believe can accelerate the learning potential of their children.
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Current market conditions and demographic trends and rising interest in early childhood education combined with the growing market demand for special needs children provides an opportunity to develop a comprehensive Pre-K learning system within the rapidly expanding Educational Brain Development market segment. Viewed as an investment or necessity by parents, child brain development products possess the unique characteristics of being recession-resistant as well as being less sensitive to price.
This is a highly fragmented market segment full of small companies that only have single (one-off) product offerings. As a result, none of these companies possess the leverage, gravitas, or product lines to dominate the market. Additionally, as the segment is cluttered with either ineffective products or lack of products addressing the needs of learning disabled children, parents and grandparents often end up purchasing products that do very little to positively impact the learning needs of their children.
Sales of Educational Brain Development videos have increased 1000% over the last five years (Sources: Forbes magazine, VDSA, Video Scan, Neilson) and are projected to exceed $1.5 billion by 2011.
Market Segmentation
We believe one of the major reasons for the growth of the preschool DVD market is pure convenience for parents. When a toddler wants to watch a program, moms need something immediately and moms want their toddlers watching something beneficial, rather than just entertaining. Preschool children thrive on schedules but they are learning literally every waking moment. The demand and need for preschool television programming is much greater than the few and inflexible hours a day which public television and cable programs are available.
We believe another reason for the growth of this market is the demand for quality educational products. Most parents want the very best for their children. And just as they watch carefully what their children eat, they care as much about watching and controlling their children’s "media diet." We believe parents prefer DVDs, videos and programs with stronger educational values to help nurture, teach and stimulate their child's brain and social development.
Strategy and Implementation Summary
We will seek to build upon an established yet highly underexploited brand. A segment of our DVD product has been university tested with positive results. Parents have raved about the products through tens of thousands of testimonials.
The results of a peer reviewed university study which will be published in The Journal for Children and Media validates the effectiveness of the content and teaching methodology used in our videos.
We believe we are well positioned to take our current 200 plus product line and re-launch it on the announcement of scientific data validating our products as superior and effective.
Direct-To-Consumer
Due to the high cost and low return on investment of national and regional print advertising, trade magazines, and consumer magazines such as American Baby, Parenting, and Child, Brainy Baby will shift to an emphasis on Public Relations and Viral Marketing though, for example, blogs. The Company has hired Productivity PR, a highly experienced and well connected boutique firm in Los Angeles to construct a high impact but mostly viral based PR initiative.
Suppliers
As noted above, the Company purchases the products it sells from the manufactures and as such relies on a large and diverse number of vendor/manufacturers. Currently we purchase the majority of our books and printed materials from Bendon Publishing International of Ashland Ohio, and the majority of our DVD’s and media products are replicated by Stephen Gould. There are a large number of publishers and replicators, both domestically and internationally, that are able to produce products developed and sold by the Company, and the Company regularly seeks competitive bids for its production needs.
Dependence on one or a few major customers
The Company’s largest customer is BayView Entertainment, LLC of Hackensak, New Jersey. Representing 15% of total sales, Bayview Entertainment, LLC distributes Brainy Baby products, particularly DVD’s, to large scale retailers, the largest being Toys R Us, which accounts for approximately 25% of our current DVD business. We are party to a distribution agreement with BayView Entertainment, LLC, dated March 1, 2010, which has a one-year term and renews automatically for successive one-year terms unless either party notifies the other party of termination with 60 days’ notice.
Competition
Our products compete most directly in the preschool education and entertainment products category, both in the United States and in select international markets. The preschool education and entertainment products category continues to attract new entrants as well as new innovative products, and competition is significant. We believe the principal methods of competition in our industry are performance, features, quality, brand recognition, price and learning content.
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Formed in 1997, the Baby Einstein line of products, owned by The Walt Disney Company, is currently the market leader in sales. Other competitors to Brainy Baby include Baby Genius (owned by Pacific Entertainment) and So Smart (the closest competitors by volume); we believe such competitors do not have the resources to maintain market shelf space There are hundreds of other titles and brands on the market, but mostly single titles with little or no marketing efforts behind them.
We face the challenge of competitors introducing similar products or functionality soon after we introduce our new products or product lines, and these competitors may be able to offer their products at lower prices using cheaper manufacturing or materials, more limited functions, or larger volume. In addition, many of our direct, indirect and potential competitors have significantly longer operating histories, greater brand recognition and substantially greater financial, technical and marketing resources than us. As our competitors seek competitive advantages and differentiation, they are increasing their investments in product research and development and advertising, focusing on global product launches and key distribution channels, expansion of retail shelf space and expansion of products sold through the web.
Our products must also compete for leisure time of children and discretionary spending of parents with other forms of media and entertainment. We design our products to bring fun to learning in order to compete favorably with these outside competitive influences. We believe that the educational content and innovation in our products allows us to compete favorably in these categories as well.
Brainy Baby's approach to competing in this market is to focus mainly on specialty, direct-to-consumer and other unique distribution avenues.
We believe we have the following competitive advantages:
• Voted # 1 in Parent Satisfaction according to Amazon.com.
• Tens of thousands of unsolicited testimonials of product effectiveness
• Nine Year old company pioneered the "baby space" in educational videos
• University tested, control group based study validating teaching methodology
• Education vs. entertainment content
• Live action vs. animation; learn from peers
• More than 75 National and International Awards
• All DVDs are 45 minutes vs. 25 minutes in length; companion books, flashcards and toys
Government Regulation
We operate in a highly regulated environment with international, federal, state and local governmental entities regulating many aspects of our business, including products and the importation of products. Regulations with which we must comply include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws and revised tax law interpretations), trade restrictions, regulations regarding financial matters, environmental regulations, advertising directed toward children, safety and other administrative and regulatory restrictions. Compliance with these and other laws and regulations could impose additional costs on the conduct of our business.
We are subject to the Consumer Product Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act, or CPSIA, the Federal Hazardous Substances Act, the Flammable Fabrics Act, regulation by the Consumer Product Safety Commission, or CPSC, and other similar federal, state and international rules and regulatory authorities, some of which have conflicting standards and requirements.
Intellectual Property
Our trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. In particular, we consider the “Brainy Baby” trademark and our related trademarks, which we have registered in the United States and internationally to be valuable to us and will aggressively seek to protect them.
Research and Development
During the years ended December 31, 2009 and 2008, Brainy Baby did not spend any funds on research and development.
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Employees
As of the date of the filing of this report, we have 10 employees, all of whom are full-time. We consider our employee relations to be good.
Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
Forward-Looking Statements
Some of the statements contained in this Form 8-K that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 8-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
· | Our ability to attract and retain management, and to integrate and maintain technical information and management information systems; |
· | Our ability to raise capital when needed and on acceptable terms and conditions; |
· | The intensity of competition; and |
· | General economic conditions. |
All written and oral forward-looking statements made in connection with this Form 8-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Plan of Operation
Brainy Acquisitions, Inc. (the "Company"), was formed on August 27, 2010 under the laws of the state of Georgia and is headquartered in Suwanee, Georgia. The Company engages in the business of selling educational DVDs, books, games, and toys for babies, toddlers and pre-schoolers both domestically and internationally through retailers under licensing agreements, as well as directly to customers primarily via internet sales.
We sell over 200 education and entertainment products aimed at children ages 9 months to 5years including DVD’s, CD’s, books, toys, games, puzzles, and flash cards.
With a global operation and sales through an international network of licensees in 60 countries, licensed broadcasting in 110 countries, distribution channels in China, Asia and Europe, our goal is to become a market leader in preschool education and early childhood development products.
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Results of Operations
Summary Income Statement for the period August 27, 2010 (Date of Inception) to September 30, 2010 (unaudited):
Sales | $ | 680 | ||
Gross profit | $ | 579 | ||
General and administrative expenses | $ | 133,861 | ||
Interest expense | $ | 350 | ||
Net loss | $ | 133,631 | ||
Loss per Share | $ | 133,631 |
For the period August 27, 2010 (Date of Inception) to September 30, 2010, the Company reported a net loss of $133,631. The loss is primarily attributable to professional fees associated with the formation of the Company, the purchase of a business through the Agreement for the Purchase and Sale of Assets of The Brainy Baby Company, LLC, and the costs incurred to enter into the Share Exchange Agreement. The Company had limited operating results.
· | The Company purchased substantially all of the assets of the Brainy Baby Company, LLC through a transaction known under Georgia Law as an Assignment for the Benefit of Creditors. In conjunction with this transaction, the Company executed a Deed of Assignment with Asset Recovery Associates, LLC (“ARA”), whereby all of the assets of Brainy Baby, including, but not limited to, all personal property, fixtures, goods, stock, inventory, equipment, furniture, furnishings, accounts receivable, bank deposits, cash, promissory notes, trade names, goodwill, contracts, claims and demands belonging to Brainy Baby, books, records, books of account, judgments, liens, and mortgages held or owned by Brainy Baby, were assigned to ARA and subsequently sold the Company. |
· | The Company accounted for the above noted transaction as a purchase of a business utilizing the carryover basis of accounting. All carrying values of assets were carried forward and recorded on the Company’s books. Members' equity of the LLC was recorded to additional paid-in-capital of the Company. |
Sales and Gross Profit
The Company has limited sales since August 27, 2010, the date of inception.
General and Administrative Expense
General and administrative expense for the period August 27, 2010 (Date of Inception) to September 30, 2010 primarily consist of professional fees associated with the Company’s formation, the review and execution of the Agreement for the Purchase and Sale of Assets of The Brainy Baby Company, LLC, and costs associated with preparing for the Share Exchange Agreement with Enter Corp.
Unaudited Pro Forma Financial Results - The following represents the unaudited pro forma financial results of the Company as if the acquisition of The Brainy Baby Company, LLC had occurred as of the beginning of the periods presented. Unaudited pro forma results are based upon accounting estimates and judgments that the Company believes are reasonable. The condensed pro forma results are not necessarily indicative of the actual results of operations of the Company had the acquisition occurred at the beginning of the periods presented, nor does it purport to represent the results of operations for future periods.
For the nine months ended September 30, | ||||
2010 | ||||
Total revenues | $ | 341,217 | ||
Net loss attributable to common stockholders | $ | (656,633 | ) | |
Loss per share | $ | (646,633 | ) |
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Liquidity
As shown in the accompanying financial statements, the Company incurred a net loss of $133,631 for the period August 27, 2010 (Date of Inception) to September 30, 2010, and as of that date, the Company’s current liabilities exceeded its current assets by approximately $258,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management plans to address this concern by doing the following:
· | Raising additional capital through convertible note offerings; |
· | Adding strategic distribution and new product offerings sales which is expected to occur during 2011 |
· | Continuing to increase brand awareness for the Company’s product lines. |
The ability of the Company to continue as a going concern is dependent on its ability to do all or most of the above listed steps. As illustrated above, the Company has already been successful in setting its plan in action and looks forward to further progress as the year progresses.
Financing Transactions
We have financed our operations since inception primarily through equity and debt financings. We have entered into two financing transactions during such period and are continuing to seek other financing initiatives. We will need to raise additional capital to meet our working capital needs, and to execute our business strategy. Such capital is expected to come from convertible debt securities and the sale of our common stock. No assurances can be given that such financing will be available in sufficient amounts or at all.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at September 30, 2010:
September 30, 2010 (unaudited) | ||||
Current Assets | $ | 422,207 | ||
Current Liabilities | $ | 680,227 | ||
Working Capital Deficit | $ | (258,020 | ) |
As of September 30, 2010, we had a working capital deficit of $258,020. The deficit is primarily comprised of the excess of the Company’s current notes payable and deferred revenue assumed during the asset purchase of The Brainy Baby Company, LLC as compared to the current asset assumed during such transaction.
Net cash used for operating activities for the period August 27, 2010 (Date of Inception) to September 30, 2010 was $48,326. The net loss for the period August 27, 2010 (Date of Inception) to September 30, 2010 was $133,631.
Net cash provided through all financing activities for the period August 27, 2010 (Date of Inception) to September 30, 2010 was $210,000.
Management anticipates being able to fund the Company’s foreseeable liquidity requirements through the financing it will continue to obtain during the rest of 2010. However, the Company can give no assurances that any additional financing will be available. The Company continues to explore potential expansion opportunities in the industry in order to boost sales, while leveraging distribution systems to consolidate lower costs. We expect that our operations will require approximately $110,000 per month for the next twelve months. We do not have sufficient cash reserves for the next twelve months and we plan to seek additional capital from the issuance of our debt or equity instruments.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, “Fair Value Measurements” ("ASC 820") to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirement for entities to disclose information about both the valuation t echniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance was effective for financial periods beginning after December 15, 2009, except the requirement to disclose Level 3 transactions on a gross basis, which becomes effective for financial periods beginning after December 15, 2010. ASU 2010-06 did not have a significant effect on the Company’s consolidated financial position or results of operations.
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Critical Accounting Policies and Estimates
We have identified critical accounting principles that affect our condensed consolidated financial statements by considering accounting policies that involve the most complex or subjective decisions or assessments as well as considering newly adopted principals. They are:
Business Combination - The Company accounted for the Agreement for the Purchase and Sale of Assets of The Brainy Baby Company, LLC ("Brainy Baby") as a purchase of a business utilizing the carryover method of accounting as there was no change in control between Brainy Baby and the Company. All carrying values of assets were carried forward and recorded on the Company’s books. Members equity of Brainy Baby was recorded to additional-paid-in capital of the Company.
Use of Estimates, Going Concern Consideration – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Among the estimates we have made in the preparation of the financial statements is an estimate of our projected revenues, expenses and cash flows in making the disclosures about our liquidity in this report. As an early stage company, many variables may affect our estimates of cash flows that could materially alter our view of our liquidity and capital requirements as our business develops. Our financial statements have been prepared assuming we are a “going concern”. No adjustment has been made in the financial statements which could result should we be unable to continue as a going concern.
Long-Lived Assets such as property and equipment and definite-lived intangible assets (DVD or CD master production copies, or "masters") are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized in the amount that the carrying amount of the asset exceeds its fair value. Fair value is determined based on discounted future net cash flows associated with the use of the asset.
Indefinite-Lived Intangible Assets are recorded at cost and consist of domestic and foreign trademarks. Trademarks are not amortized since they have indefinite lives, but instead are reviewed annually for impairment. Costs to renew trademarks and costs to update masters are expensed as incurred.
Share-Based Compensation - US GAAP requires companies to expense employee share-based payments (including options, restricted stock units and performance stock units) based on fair value. We must use our judgment to determine key factors in determining the fair value of the share-based payment, such as volatility, forfeiture rates and the expected term in which the award will be outstanding.
Revenue Recognition - The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition and records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related customer receivable is reasonably assured. There is no stated right of return for products. Sales are recognized upon shipment of products to customers.
The Company enters into licensing agreements whereby the licensee agrees to pay a percentage of net sales of the licensed products. Most of the agreements require the licensee to pay guaranteed minimum royalty payments upon entering into the agreement. Advanced royalty payments associated with these agreements are recorded as deferred revenue and royalties are recognized as revenue as licensees sell the licensed products.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
Item 3. Properties
Our principal executive offices are located at 460 Brogdon Road, Suite 400, Suwanee, GA 30024. Our lease commenced in March 2007 and has a seven year term. Our current monthly rent is $4,688 and we $915 monthly for common area maintenance.
Item 4. Security Ownership of Certain Beneficial Owner and Management
The following table sets forth certain information, as of November 24, 2010 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
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Name of Beneficial Owner (1) | Common Stock Beneficially Owned | Percentage of Common Stock (2) |
Dennis Fedoruk | 1,496,666 | 34.3% |
Ronda Bush | 400,000(3) | 9.2% |
John Benfield | 333,333 | 7.6% |
Tony Erwin | 33,333 | * |
Derek Schwerzler | 6,667 | * |
All officers and directors as a group | 2,269,999 | 52.1% |
* Less than 1%
(1) | Except as otherwise indicated, the address of each beneficial owner is c/o Brainy Acquisitions, Inc., 460 Brogdon Road, Suite 400, Suwanee, GA. 30024. |
(2) | Applicable percentage ownership is based on 4,359,998 shares of common stock outstanding as of November 24, 2010 together with securities exercisable or convertible into shares of common stock within 60 days of November 24, 2010 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of November 24, 2010 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
(3) | Includes 133,333 shares held by Ronda Bush’s husband. |
Item 5. Directors and Executive Officers
Below are the names and certain information regarding the Company’s executive officers and directors following the acquisition of Brainy Acquisitions.
Name | Age | Position | |||
John P. Benfield | 60 | Chief Executive Officer and Director | |||
Ronda Bush | 50 | Chief Operations Officer | |||
Dennis Fedoruk | 56 | Chairman, President, Chief Creative Officer | |||
Tony Erwin | 42 | Director | |||
Derek Schwerzler | 34 | Director |
Directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors. The Board of Directors does not have any committees. To date, no amount has been paid to a director for the services of such individual on the Board.
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Background of Executive Officers and Directors
John P. Benfield, Chief Executive Officer and Director
John P. Benfield has been Chief Executive Officer of the Company since November 24, 2010. Since June 2008, Mr. Benfield has been Founder and Managing Partner of Wall & Madison Media, LLC, a marketing strategies firm. From August 2006 to May 2008, Mr. Benfield was CEO Direct Marketing Services of Next Jump Inc. From February 1995 to July 2006 Mr. Benfield was Chairman and Chief Executive Officer of Coactive Marketing Group, Inc.
Mr. Benfield built a publicly traded $100 million integrated marketing services company with 235 full time employees and a blue chip client roster which he grew from a $5million promotion niche shop.
Mr. Benfield’s growth oriented strategic leadership has provided innovative business solutions for 33 years; 15 years in package, marketing, sales, manufacturing, and 18 years in the Marketing and Promotion services segment with companies like Colgate Palmolive, General Mills, Coca Cola, and Walmart.
Mr. Benfield is recognized for his ability to identify growth and revenue stream opportunities, effectively align resources and execute. Mr. Benfield has proven success with start- ups, turnarounds, M&A, and growth business environments; he is a senior executive experienced with public environment GAAP and Sarbox compliance management. Mr. Benfield received his BA from State University College of New York and his MBA from Adelphi University.
Ronda Bush, Chief Operations Officer
Ronda Bush has been the Company’s Chief Operations Officer since November 24, 2010, and served as Brainy Baby’s Chief Operations Officer from its formation in 2001.
Ms. Bush spent several years in the banking industry before forming Fiscal Integrity, a company which provided accounting services to small, growing businesses. One of the many clients Ms. Bush served was a business for Dennis Fedoruk. This launched an 18 year business relationship servicing all business aspects for Mr. Fedoruk, in which her responsibilities included purchasing, operations, accounting and contract negotiations.
Tony Erwin, Director
Tony Erwin has been a director of the Company since November 24, 2010.
Since June 2010, Mr. Erwin has been LAN Systems Engineer at Barcode Communications. From April 2008 to June 2010, Mr. Erwin was President and owner of Skyrocket Financial Solutions LLC, which provides business consulting and finance solutions. Mr. Erwin has worked extensively with manufacturers, technology companies and traditional businesses providing advice, direction, access to capital, creative cash flow solutions as well as sources for equipment financing.
From September 1997 to April 2008 Mr. Erwin was Systems Engineer for Silicon Valley based Foundry Networks where he sold and installed products to NASA, the military, universities, service providers, financial institutions and other ancillary markets.
Mr. Erwin sits on the Gwinnett Technology Council for the Gwinnett Chamber of Commerce and is on the sub-committee for the Advanced Technology Development Center's expansion into the north-metro Atlanta area. He is a member of the National Funding Association (NFA ) and is pursuing the designation as a Charted Financial Analyst (CFA ). Mr. Erwin received his Bachelor’s degree in business finance with honors, from the University of Phoenix and is an active Angel investor in the Atlanta area where he serves as the chairman of the membership committee of the Network of Business Angels and Investors (NBAI) Atlanta chapter.
19
Dennis Fedoruk, Chief Creative Officer and Chairman
Dennis Fedoruk has been Chief Creative Officer, President and Chairman of the Company since November 24, 2010. Mr. Fedoruk is the founder of Brainy Baby. Dennis Fedoruk launched his business career in his hometown of Detroit, MI. After obtaining his BFA from The Center from Creative Studies in Detroit, he quickly became a true entrepreneur in multiple businesses that has now spanned more than 30 years.
After moving to Atlanta GA, Mr. Fedoruk continued his business endeavors and worked with Fortune 500 companies such as The Discovery Channel, Delta Air Lines, Coca-Cola USA, IBM and ABC News. In 1995, Mr. Fedoruk created the Brainy Baby brand, which led to the formation of The Brainy Baby Company, LLC in 2001. Mr. Fedoruk has grown the company to more than 200 products sold in more than 70 counties world-wide.
Derek Schwerzler, Director
Derek Schwerzler has been a director of the Company since November 24, 2010. Since January 2000 Mr. Schwerzler has been President of Presidential Packaging. From January 2005 to July 2010 Mr. Schwerzler was also owner/partner of BatteryKits.com.
Directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers serve at the discretion of the board of directors. The Board of Directors does not have any committees. To date, no amount has been paid to a director for the services of such individual on the Board.
Board Leadership Structure and Role in Risk Oversight
Due to the small size and early stage of the Company, we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined. These roles are currently separated, with Mr. Benfield serving as Chief Executive Officer and Mr. Fedoruk as Chairman.
Our board of directors is primarily responsible for overseeing our risk management processes on behalf of our board of directors. The board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The board of directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has been:
• | the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
• | convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
• | subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or |
• | found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law. |
Code of Ethics
We have not 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 because of the small number of persons involved in the management of the Company.
Nominating Committee
We have not adopted any procedures by which security holders may recommend nominees to our Board of Directors.
20
Audit Committee
The Board of Directors acts as the Audit Committee and the Board has no separate committees. The Company has no qualified financial expert at this time because it has not been able to hire a qualified candidate. Further, the Company believes that it has inadequate financial resources at this time to hire such an expert.
Item 6. Executive Compensation
The following table sets forth all compensation paid in respect of Brainy Baby’s principal executive officer and those individuals who received compensation in excess of $100,000 per year for our last two completed fiscal years. No other officer of Brainy Baby received compensation in excess of $100,000 for either of our last two completed fiscal years.
SUMMARY COMPENSATION TABLE
Name & Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||
Dennis Fedoruk , Managing Member | 2009 | 89,612 | - | - | - | - | - | - | $ | 89,612 | ||||||||||||||||||
2008 | 157,853 | - | - | - | - | - | - | $ | 157,853 |
During the years ended December 31, 2009 and 2008, Enter did not pay any compensation to its executive officers or directors except for the issuance of 400,000 shares valued at $8,000, to its Secretary and Director, Nahman Morgenstern, on February 4, 2008, in consideration of services rendered, introducing Mr. Ayalon to business people in Georgia and to Israeli farming experts who were familiar with Georgian farming. These experts gave advice to Mr. Ayalon without being compensated.
Employment Agreements
The Company is party to employment agreements with John Benfield, Dennis Fedoruk, and Ronda Bush, each dated November 24, 2010.
Pursuant to our employment agreement with John Benfield (the “Benfield Agreement”), Mr. Benfield serves as our Chief Executive Officer. We issued Mr. Benfield 13.33 shares of common stock of Brainy Acquisitions, which, pursuant to the Exchange Agreement, were exchanged for 333,333 shares of common stock of the Company. Mr. Benfield receives an annual base salary of $1. The Benfield Agreement may be terminated by either party upon 90 days written notice. Mr. Benfield also receives compensation in connection with our agreement with Wall & Madison, LLC. See “Certain Relationships and Related Transactions.”
21
Pursuant to our employment agreement with Dennis Fedoruk (the “Fedoruk Agreement”), Mr. Fedoruk serves as our Chief Creative Officer and President. We issued Mr. Fedoruk 59.88 of common stock of Brainy Acquisitions, which, pursuant to the Exchange Agreement, were exchanged for 1,496,666 shares of common stock of the Company. We agreed to pay Mr. Fedoruk an initial base salary of $120,000, which may be increased annually in the Company’s discretion. We also agreed to issue Mr. Fedoruk 400,000 shares of common stock of the Company nine months from the date of the Fedoruk Agreement, and an additional 346,667 shares of common stock nine months from the date of Fedoruk Agreement (subject to adjustment in the event of stock splits or stock dividends, including the Company’s anticipated 7.5 to 1 forward stock split in the form of a stock dividend). The Fedoruk Agreement may be terminated by either party upon 90 days written notice. The Fedoruk Agreement has a term of three years, and renews automatically for successive terms of one year at Mr. Fedoruk’s discretion. If we terminate the agreement without Cause (as defined therein), Mr. Fedoruk will be entitled to compensation for the remaining term plus twelve months’ salary and continuing benefits for a period of two years.
Pursuant to our employment agreement with Ronda Bush (the “Bush Agreement”), Ms. Bush serves as our Chief Operations Officer. We issued Ms. Bush 10.67 of common stock of Brainy Acquisitions, which, pursuant to the Exchange Agreement, was exchanged for 266,667 shares of common stock of the Company. We agreed to pay Ms. Bush an initial base salary of $96,000, which may be increased annually in the Company’s discretion. The Bush Agreement may be terminated by either party upon 90 days written notice. The Bush Agreement has a term of three years, and renews automatically for successive terms of one year at Ms. Bush’s discretion. If we terminate the agreement without Cause (as defined therein), Ms. Bush will be entitled to compensation for the remaining term plus twelve months’ salary and continuing benefits for a period of two years.
Outstanding Equity Awards at Fiscal Year-End
We had no outstanding equity awards as of December 31, 2009.
Director Compensation
No director of Brainy Baby or Enter received any compensation for services as director for the year ended December 31, 2009.
Risk Management
The Company does not believe risks arising from its compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the Company.
Item 7. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
On January 31, 2008, Enter issued 5,000,000 shares of common stock to Itzhak Ayalon, its President, CEO, Treasurer and director at that time, in consideration of $100,000.
On February 4, 2008 Enter issued 400,000 shares of our common stock to Nahman Natan Morgenstern, its Secretary and Director in consideration of services rendered, which were determined by our Board of Directors to have a value of $8,000.
On November 15, 2010, we entered into a letter of agreement with Wall & Madison, LLC (“Wall”), pursuant to which we retained Wall to provide marketing, consulting and related services, for a monthly fee of $12,000. The agreement has a term of 18 months after which it shall renew automatically for successive monthly terms unless mutually renegotiated or terminated by either party at any time upon sixty days written notice. John Benfield, the Company’s chief executive officer, is the managing partner of Wall .
On November 24, 2010, the Company entered into separation agreements with Itzhak Ayalon and Nahman Morgenstern, pursuant to which the Company purchased from Mr. Ayalon and Mr. Morgenstern an aggregate of 5,400,000 of the Company’s common stock, for a purchase price of $100,000. Mr. Ayalon was the Company’s President, Chief Executive Officer, Treasurer and Director. Mr. Morgenstern was the Company’s Secretary and Director.
Director Independence
Derek Schwerzler is independent as that term is defined under the Nasdaq Marketplace Rules.
Item 8. Legal Proceedings
We are not party to any legal proceedings.
Item 9. Market Price of and Dividends on Common Equity and Related Stockholder Matters
The Company’s common stock is eligible for quotation on the OTC Bulletin Board under the symbol “ETRR.” There has been no reported trading to date in the Company’s common stock.
As of November 24, 2010, there were approximately 61 holders of record of the Company’s common stock.
As of November 24, 2010, we had no shares reserved for issuance.
As of November 24, 2010: (i) 0 shares of common stock are subject to outstanding options or warrants to purchase, or securities convertible into, common stock; (ii) 0 shares of common stock can be sold pursuant to Rule 144 under the Securities Act of 1933, as amended, and (iii) 0 shares of common stock are being, or has been publicly proposed to be, publicly offered by the Company.
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Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2009, we did not have any equity compensation plan.
Item 10. Recent Sales of Unregistered Securities
See Item 1.01.
On January 31, 2008, Enter issued 5,000,000 shares of our common stock to Itzhak Ayalon, its President, CEO, Treasurer and Director at that time, in consideration of $100,000.
On February 4, 2008, Enter issued 400,000 shares of common stock to Nahman Morgenstern, its Secretary and Director in consideration of services rendered, which were determined by our Board of Directors to have a value of $8,000.
The shares that were issued to each of Mr. Ayalon and Mr. Morgenstern were issued in a transaction that was exempt from the registration requirements of the Securities Act pursuant to Regulation S promulgated by the Securities and Exchange Commission.
In March through August of 2008, Enter issued 1,640,000 shares of common stock to 41 investors in a private placement pursuant to the exemption from the registration requirements of the Securities Act provided by Regulation S. The aggregate consideration paid for such shares was $41,000. All investors in such private placement were non-US persons (as defined under SEC Regulations). The Company provided all investors with a subscription agreement and the shares were issued in transactions that were exempt from the registration requirements of the Securities Act pursuant to Regulation S promulgated by the Securities and Exchange Commission.
On November 15, 2010, Brainy Acquisitions issued 100 shares of common stock to employees and consultants for services. Brainy Acquisitions relied on the exemption from registration provided by Section 4(2) of the Securities Act for transactions not involving a public offering.
On November 24, 2010, the Company issued 200,000 shares of common stock to Garden State and its designees for a purchase price of $0.001 per share. The Company relied on the exemption from registration provided by Section 4(2) of the Securities Act for transactions not involving a public offering.
On November 24, 2010, the Company issued 20,000 shares of common stock to Sichenzia Ross Friedman Ference LLP for legal services. The Company relied on the exemption from registration provided by Section 4(2) of the Securities Act for transactions not involving a public offering.
Item 11. Description of Registrant’s Securities to be Registered
The Company’s authorized capital stock consists of 100,000,000 shares of common stock at a par value of $0.0001 per share. As of November 24, 2010, there were 4,359,998 shares of the Company’s common stock issued and outstanding that are held by approximately 61 stockholders of record.
Holders of the Company’s common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of common stock voting for the election of directors can elect all of the directors. Holders of the Company’s common stock representing a majority of the voting power of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders. A vote by the holders of a majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to the Company’s certificate of incorporation.
Holders of the Company’s common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock. The Company’s common stock has no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to the Company’s common stock.
23
Item 12. Indemnification of Directors and Officers
The Company’s certificate of incorporation and by-laws contains certain provisions permitted under Delaware General Corporation Law relating to the liability of directors. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty, except in certain circumstances where such liability may not be eliminated under applicable law. Further, the Company’s certificate of incorporation and by-laws contain provisions to indemnify the Company’s directors and officers to the fullest extent permitted by Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Item 13. Financial Statements and Supplementary Data
Reference is made to the filings by Enter on Form 10-Q for Enter’s financial statements.
The financial statements of Brainy Acquisitions and Brainy Baby begin on Page F-1.
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 15. Exhibits.
See Item 9.01.
Item 3.02 Unregistered Sales of Equity Securities.
See Item 1.01.
Item 5.01 Changes in Control of Registrant.
See Item 2.01.
Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.
See Item 1.01.
Item 5.06 Change in Shell Company Status.
See Item 1.01.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of Brainy Acquisitions and Brainy Baby, are included following the signature page.
(b) Pro forma financial information. Not applicable.
(c) Shell Company Transactions. See (a) and (b) of this Item 9.01.
24
(d) Exhibits
Exhibit Number | Description | ||
10.1 | Share Exchange Agreement, dated November 24, 2010, between the Company, Brainy Acquisitions, and the shareholders of Brainy Acquisitions | ||
10.2 | Subscription Agreement, dated November 24, 2010, between the Company and the Investors | ||
10.3 | Subsidiary Guarantee, dated November 24, 2010, between Brainy Acquisitions and the Collateral Agent named therein | ||
10.4 | Security Agreement, dated November 24, 2010, between the Company, Brainy Acquisitions, and the Investors | ||
10.5 | Form of Note | ||
10.6 | Form of Warrant | ||
10.7 | Escrow Agreement, dated November 24, 2010, among Enter Corp., the subscribers listed on Schedule I thereto, and Grushko & Mittman, P.C. | ||
10.8 | Deed of Assignment, dated September 24, 2010, between Brainy Baby and Asset Recovery Associates, LLC | ||
10.9 | Agreement for the Purchase and Sale of Assets of The Brainy Baby Company, LLC, dated September 23, 2010, between Asset Recovery Associates, as assignee for the creditors of Brainy Baby, and Brainy Acquisitions | ||
10.10 | Letter of Agreement, dated November 15, 2010, between Brainy Acquisitions and Wall & Madison LLC | ||
10.11 | Distribution Agreement, dated March 1, 2010, between Brainy Baby and BayView Entertainment | ||
10.12 | Suwanee Center Standard Multi-Tenant Lease, dated March 27, 2007, between Brogdon Place II, LLC and Brainy Baby | ||
10.13 | Employment Agreement, dated November 24, 2010, among Enter Corp., Brainy Acquisitions and John Benfield | ||
10.14 | Employment Agreement, dated November 24, 2010, among Enter Corp., Brainy Acquisitions and Dennis Fedoruk | ||
10.15 | Employment Agreement, dated November 24, 2010, among Enter Corp., Brainy Acquisitions and Ronda Bush | ||
10.16 | Letter agreement, dated November 15, 2010, between Brainy Acquisitions and Garden State Securities, Inc. | ||
10.17 | Securities Purchase Agreement, dated September 22, 2010, between Brainy Acquisitions and FLM Holdings LLC | ||
10.18 | Debenture, dated September 22, 2010 | ||
10.19 | Security Agreement, dated September 22, 2010, between Brainy Acquisitions and FLM Holdings LLC | ||
10.20 | Second Securities Purchase Agreement, dated September 29, 2010, between Brainy Acquisitions and FLM Holdings LLC | ||
10.21 | Debenture, dated September 29, 2010 | ||
10.22 | Amended and Restated Security Agreement, dated September 29, 2010, between Brainy Acquisitions and FLM Holdings LLC | ||
10.23 | Third Securities Purchase Agreement, dated October 29, 2010, between Brainy Acquisitions and FLM Holdings LLC | ||
10.24 | Debenture, dated October 29, 2010 | ||
10.25 | Second Amended and Restated Security Agreement, dated October 29, 2010, between Brainy Acquisitions and FLM Holdings LLC | ||
10.26 | Separation Agreement, dated November 24, 2010, among Enter Corp., Brainy Acquisitions and Itzhak Ayalon | ||
10.27 | Separation Agreement, dated November 24, 2010, among Enter Corp., Brainy Acquisitions and Nahman Morgan Stein | ||
99.1 | PowerPoint presentation provided to Investors |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ENTER CORP. | |||
Dated: November 24, 2010 | By: | /s/ John Benfield | |
Name: John Benfield | |||
Title: Chief Executive Officer | |||
26
BRAINY ACQUISITIONS, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
F-1
BRAINY ACQUISITIONS, INC.
TABLE OF CONTENTS
PAGE | |
Financial statements: | |
Balance sheet | F-3 |
Statement of operations | F-4 |
Statement of cash flows | F-5 |
Notes to financial statements | F-6- F-15 |
F-2
BRAINY ACQUISITIONS, INC.
Balance Sheet
(unaudited)
September 30, 2010 | ||||
Assets | ||||
Assets: | ||||
Cash | $ | 168,042 | ||
Accounts receivable, no allowance for doubtful accounts | 84,660 | |||
Inventory, net | 130,550 | |||
Prepaid expenses and other | 38,955 | |||
Total Current Assets | 422,207 | |||
Property and equipment, net | 265,112 | |||
Intangible assets, net | 450,566 | |||
Total Assets | $ | 1,137,885 | ||
Liabilities and Shareholders' Equity | ||||
Liabilities: | ||||
Accounts payable | $ | 42,004 | ||
Accrued expenses | 35,350 | |||
Deferred revenue | 235,762 | |||
Notes payable | 326,667 | |||
Other current liabilities | 40,444 | |||
Total Liabilities, All Current | 680,227 | |||
Shareholders' Equity | ||||
Common stock, no par value, 100 shares authorized, stated value $1, | ||||
1 share issued and outstanding | 1 | |||
Additional paid-in-capital | 591,289 | |||
Accumulated deficit | (133,631 | ) | ||
Total Shareholders' Equity | 457,658 | |||
Total Liabilities and Shareholders' Equity | $ | 1,137,885 |
See accompanying notes to financial statements.
F-3
BRAINY ACQUISITIONS, INC.
Statement of Operations
(unaudited)
Period from August 27, 2010 (date of inception) to September 30, | ||||
2010 | ||||
Product sales | $ | 680 | ||
Cost of sales | 101 | |||
Gross profit | 579 | |||
Selling, general and administrative expenses | 134,211 | |||
Net Loss | $ | (133,631 | ) | |
Net Loss per Common Share - Basic and Diluted | $ | (133,631 | ) | |
Weighted Average Number of Common Shares Outstanding | 1 | |||
See accompanying notes to financial statements.
F-4
BRAINY ACQUISITIONS, INC.
Statement of Cash Flows
(unaudited)
Period from August 27, 2010 (date of inception) to September 30, | ||||
2010 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
Net loss | $ | (133,631 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Changes in operating assets and liabilities: | ||||
(Increase) Decrease in: | ||||
Accounts receivable | (652 | ) | ||
Inventory | (1,397 | ) | ||
Prepaid expenses | 10,000 | |||
Increase (Decrease) in: | ||||
Accounts payable and accrued expenses | 77,354 | |||
Net Cash Used in Operating Activities | (48,326 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
Purchase of a business | (87,500 | ) | ||
Cash received in purchase of a business | 3,868 | |||
Net Cash Used in Investing Activities | (83,632 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
Proceeds from notes payable | 300,000 | |||
Net Cash Provided By Financing Activities | 300,000 | |||
Net Increase in Cash | 168,042 | |||
Cash - Beginning of Period | - | |||
Cash - End of Period | $ | 168,042 |
See accompanying notes to financial statements.
F-5
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Note A
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations:
Brainy Acquisitions, Inc. (the "Company") was formed on August 27, 2010 under the laws of the state of Georgia and is headquartered in Suwanee, Georgia. The Company engages in the business of selling educational DVDs, books, games and toys for babies, toddlers and pre-schoolers both domestically and internationally through retailers under licensing agreements, as well as directly to customers primarily via internet sales.
Basis of Presentation:
The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations.
Purchase of a Business:
On September 23, 2010, the Company entered into an Agreement for the Purchase and Sale of Assets of the The Brainy Baby Company, LLC with Asset Recovery Associates, LLC (“ARA”) as assignee for the benefit of creditors of The Brainy Baby Company, LLC (“LLC”).
The Company purchased the assets previously assigned by the LLC to ARA. The purchase price was $87,500, which was paid in cash at closing. The Company did not assume any debt, accounts payable, contracts, agreements, commitments, or other obligations or liabilities of LLC except for certain equipment lease obligations.
This transaction is known under Georgia law as an Assignment for the Benefit of Creditors. In conjunction with this transaction, the LLC executed a Deed of Assignment (the “Agreement”) with ARA, whereby all of the assets of the LLC, including, but not limited to, all personal property, fixtures, goods, stock, inventory, equipment, furniture, furnishings, accounts receivable, bank deposits, cash, promissory notes, trade names, goodwill, contracts, claims and demands belonging to the LLC, books, records, books of account, judgments, liens, and mortgages held or owned by the LLC, were assigned to ARA.
F-6
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
The Company accounted for the above noted transaction as a purchase of a business. Since it is anticipated that the original LLC’s 95% owner will receive more than a controlling interest in the Company for future services after the transaction there was “in substance for accounting purposes” no change in control and therefore the carry over basis of accounting is appropriate. The carrying value of the assets acquired were carried forward from the LLC and recorded on the Company’s books. Members equity of the LLC was recorded to additional paid in capital of the Company.
The Company recorded the opening balance sheet utilizing the carryover method of accounting as of September 23, 2010:
Cash | $ | 3,868 | |
Accounts receivable, net | 84,009 | ||
Inventory, net | 129,153 | ||
Prepaid consulting | 48,955 | ||
Property and equipment, net | 265,112 | ||
Intangible assets, net | 450,566 | ||
Notes payable | (26,667 | ) | |
Deferred revenue | (235,762 | ) | |
Other current liabilities | (40,444 | ) | |
Additional paid-in-capital | $ | (591,290 | ) |
The following represents the unaudited pro forma financial results of the Company as if the acquisition of LLC had occurred as of the beginning of the period presented. Unaudited pro forma results are based upon accounting estimates and judgments that the Company believes are reasonable. The pro forma results are not necessarily indicative of the actual results of operations of the Company had the acquisition occurred at the beginning of the period presented, nor does it purport to represent the results of operations for future periods.
For the nine months ended September 30, 2010 (unaudited) | ||||
Total revenues | $ | 341,217 | ||
Net loss attributable to common stockholders | $ | (656,633 | ) | |
Loss per share | $ | (646,633 | ) |
F-7
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Risks and uncertainties:
The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates are used for, but not limited to, the allowance for doubtful accounts and inventory valuation. Actual results could differ from these estimates.
Cash:
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. Cash balance at times may exceed federally insured limits.
The United States Congress has temporarily increased the Federal Deposit Insurance Corporation (FDIC) deposit insurance from $100,000 to $250,000 per depositor. As of September 30, 2010 the Company had monies in bank accounts which did not exceed such limits.
Accounts Receivable:
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts. Management did not consider an allowance for doubtful accounts necessary.
Inventory:
Inventory is stated at the lower of cost or market and is valued using the weighted-average method. Provisions are made in each year for the estimated effect of obsolete and slow-moving inventories.
F-8
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Property and Equipment:
Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed currently, while renewals and betterments that materially extend the life of an asset are capitalized. The cost of assets sold, retired, or otherwise disposed of, and the related allowance for depreciation are eliminated from the accounts, and any resulting gain or loss is recognized in the statement of operations.
Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
Furniture and equipment | 3 - 7 Years |
Vehicle | 5 Years |
Leasehold improvements | Lesser of estimated useful life or life of the lease |
Impairment of Long-Lived Assets:
Long-lived assets such as property and equipment and definite-lived intangible assets (DVD or CD master production copies, or "masters") are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized in the amount that the carrying amount of the asset exceeds its fair value. Fair value is determined based on discounted future net cash flows associated with the use of the asset.
Indefinite-Lived Intangible Assets:
Indefinite-lived intangible assets are recorded at cost and consist of domestic and foreign trademarks. Trademarks are not amortized since they have indefinite lives, but instead are reviewed annually for impairment. Costs to renew trademarks and costs to update masters are expensed as incurred.
Based on the Company's estimated cost to replace the trademarks and expected future undiscounted cash flows generated by the masters, no impairment was recorded at September 30, 2010.
Revenue Recognition:
Revenue from the sale of products is recognized at the time of shipment.
The Company enters into licensing agreements whereby the licensee agrees to pay a percentage of net sales of the licensed products. Most of the agreements require the licensee to pay guaranteed minimum royalty payments upon entering into the agreement. Advanced royalty payments associated with these agreements are recorded as deferred revenue and royalties are recognized as revenue as licensees sell the licensed products.
F-9
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Shipping and Handling Costs:
The Company classifies shipping and handling amounts billed to customers as product sales and shipping and handling costs as a component of cost of sales.
Income Taxes:
The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC Topic 740, “Income Taxes,” which requires that the Company recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
Accounting guidance now codified as FASB ASC Topic 740-20, “Income Taxes – Intraperiod Tax Allocation,” clarifies the accounting for uncertainties in income taxes recognized in accordance with FASB ASC Topic 740-20 by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. FASB ASC Topic 740-20 requires that any liability created for unrecognized tax benefits is disclosed. The application of FASB ASC Topic 740-20 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. The Company would recognize interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2010, respectively, the Company did not record any liabilities for uncertain tax positions.
Fair Value of Financial Instruments:
In specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the Company's principal market for the asset or liability at the measurement date for such transactions. If the Company's has not an established a principal market for transactions of a particular asset or liability, fair value is determined based on the most advantageous market.
Valuation inputs used to determine fair value are arranged in a hierarchy that categorize the inputs into three broad levels, which are as follows:
• | Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
• | Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs. |
• | Level 3 inputs are unobservable inputs for the asset or liability. |
F-10
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
The Company’s financial instruments include cash, accounts receivable, accounts payable, notes payable and accrued liabilities. Financial instruments are reported at historical cost, which is not materially different than fair value due to the short expected duration or holding period of the assets and liabilities.
The Company’s non-financial assets consist of property and equipment and masters, which are reported at cost less accumulated depreciation and amortization, and trademarks which are recorded at cost and is not amortized. Upon the occurrence of certain events, the Company is required to perform an impairment test of property and equipment. If the impairment test indicates that an impairment has occurred, the carrying value of property and equipment is reduced to its then current fair value and an impairment charge is recognized in net income. The Company has no non-financial liabilities.
Recent Accounting Pronouncements:
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, “Fair Value Measurements” ("ASC 820") to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance was effective for financial periods beginning after December 15, 2009, except the requirement to disclose Level 3 transactions on a gross basis, which becomes effective for financial periods beginning after December 15, 2010. ASU 2010-06 did not have a significant effect on the Company’s financial position or results of operations.
The Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) became the sole authoritative source of generally accepted accounting principles in the United States for periods ending after September 15, 2009. The FASB ASC incorporates all authoritative accounting literature previously issued by a standard setter. Adoption of the FASB ASC had no effect on the Company’s financial position, results from operations, members’ deficit or cash flows.
F-11
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Note B
Liquidity
The ability of the Company to continue its operations is dependent on management's plans, which include the raising of capital through debt and/or equity markets with additional funding from other traditional financing sources, including term notes and convertible notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
In response to these liquidity issues, management has taken the following actions:
· | Raising additional capital through convertible note offerings |
· | Signing up new distributors |
· | Developing increased brand awareness |
· | Developing new technologies and bringing these additional technologies to market |
Note C
Stockholders’ Equity
On August 27, 2010, the Company issued one common share to its founder for services rendered. The Company valued the share at $1.
Note D
Inventory
The components of inventory are as follows as of September 30, 2010:
Finished goods | $ | 201,405 | ||
Less reserve for obsolescence and slow-moving inventory | (70,855 | ) | ||
Net inventory | $ | 130,550 |
F-12
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Note E
Property and Equipment
Property and equipment consisted of the following at September 30, 2010:
Leasehold improvements | $ | 60,665 | ||
Furniture and equipment | 9,968 | |||
Vehicle | 950 | |||
Property and equipment, net | $ | 71,583 |
Note F
Intangible Assets
Intangible assets were comprised of the following at September 30, 2010:
Estimated life | Gross Amount | Accumulated Amortization | Net | ||||||||||
Masters | 10 years | $ | 175,811 | $ | - | $ | 175,811 | ||||||
Masters in production | 10 years | 17,718 | - | 17,718 | |||||||||
Trademarks | Indefinite | 450,566 | - | 450,566 | |||||||||
$ | 644,095 | $ | - | $ | 644,095 |
Estimated future amortization expense is as follows:
Year Ending December 31 | ||||
2010 | $ | 13,348 | ||
2011 | 51,759 | |||
2012 | 42,154 | |||
2013 | 33,682 | |||
2014 | 22,609 | |||
Thereafter | 12,259 | |||
$ | 175,811 |
F-13
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Note G
Notes Payable
Notes payable consisted of the following at September 30, 2010:
Note payable to a company; bearing interest at 10%; secured by all assets of the Company, with principal and interest due at maturity on March 23, 2011. The note contains a material adverse change clause, which states that if such a change occurs in the Company's financial condition or the lender believes the prospect of payment of the note payable is impaired, the note payable will be considered to be in default. | $ | 110,000 | ||
Note payable to a company; bearing interest at 10%; secured by all assets of the Company, with principal and interest due at maturity on March 29, 2011. The note contains a material adverse change clause, which states that if such a change occurs in the Company's financial condition or the lender believes the prospect of payment of the note payable is impaired, the note payable will be considered to be in default. | 190,000 | |||
Total notes payable | $ | 300,000 |
F-14
BRAINY ACQUISITIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(unaudited)
Note H
Commitments
Operating Leases
The Company leases office space and warehouse and office equipment under non-cancelable operating leases expiring on various dates through August 2014.
At September 30, 2010 future minimum lease payments under non-cancelable operating leases were as follows:
Year Ending December 31 | ||||
2010 | $ | 14,848 | ||
2011 | 61,039 | |||
2012 | 62,735 | |||
2013 | 59,978 | |||
2014 | 56,347 | |||
$ | 254,947 |
Note I
Subsequent Events
The Company evaluated subsequent events through November 22, 2010, when these financial statements were available to be issued.
Issuance of Common Stock for Services
On November 15, 2010, the Company issued 99 shares of common stock for services to be performed to consultants, employees and officers of the Company.
F-15
THE BRAINY BABY COMPANY, LLC
FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
F-16
THE BRAINY BABY COMPANY, LLC
TABLE OF CONTENTS
PAGE | |
Financial statements: | |
Balance sheet | F-18 |
Statement of operations and members' deficit | F-19 |
Statement of cash flows | F-20 |
Notes to financial statements | F21 - F-26 |
F-17
THE BRAINY BABY COMPANY, LLC
Balance Sheet
(unaudited)
September 30, 2010 | ||||
Liabilities and Member' Deficit | ||||
Liabilities: | ||||
Cash overdraft | $ | 2,927 | ||
Accounts payable | 300,649 | |||
Accrued expenses | 483,914 | |||
Accrued interest | 356,194 | |||
Notes payable | 554,936 | |||
Credit cards payable | 319,562 | |||
Other current liabilities | 36,028 | |||
Total Liabilities, All Current | 2,054,209 | |||
Total Members' Deficit | (2,054,209 | ) | ||
Total Liabilities and Members' Deficit | $ | - |
See accompanying notes to financial statements.
F-18
THE BRAINY BABY COMPANY, LLC
Statement of Operations
(unaudited)
Nine Months Ended September 30, | ||||
2010 | ||||
Product sales | $ | 225,937 | ||
Licensing income | 114,640 | |||
Total revenues | 340,577 | |||
Cost of sales | 60,658 | |||
Gross profit | 279,919 | |||
Selling, general and administrative expenses | 693,451 | |||
Depreciation and amortization | 60,583 | |||
Gain on extinguishment of debt | (266,732 | ) | ||
Loss on sale of assets | 658,552 | |||
Total operating expenses | 1,145,855 | |||
Loss from operations | (865,936 | ) | ||
Other income (expense) | ||||
Interest expense | (92,461 | ) | ||
Interest income | 1,770 | |||
Total other income (expense) | (90,691 | ) | ||
Net loss | (956,627 | ) | ||
Members' deficit, beginning of year | (1,097,582 | ) | ||
Members' deficit, end of year | $ | (2,054,209 | ) |
See accompanying notes to financial statements.
F-19
THE BRAINY BABY COMPANY, LLC
Statement of Cash Flows
(unaudited)
Nine Months Ended September 30, 2010 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
Net loss | $ | (956,627 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Depreciation and amortization | 60,583 | |||
Loss on sale of assets | 658,552 | |||
Gain on extinguishment of debt | (266,732 | ) | ||
Changes in operating assets and liabilities: | ||||
(Increase) Decrease in: | ||||
Accounts receivable | (16,825 | ) | ||
Inventory | (32,982 | ) | ||
Prepaid expenses | (34,524 | ) | ||
Increase (Decrease) in: | ||||
Accounts payable and accrued expenses | 284,301 | |||
Accrued interest | 51,528 | |||
Deferred revenue | 98,427 | |||
Credit cards payable | (11,173 | ) | ||
Other current liabilities | 36,102 | |||
Net Cash Used in Operating Activities | (129,370 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
Net borrowings on line of credit | 34,575 | |||
Proceeds from notes payable | 150,000 | |||
Principal payments on notes payable | (55,000 | ) | ||
Net borrowings from related party | (2,384 | ) | ||
Increase in cash overdraft | 1,903 | |||
Net Cash Provided By Financing Activities | 129,094 | |||
Net Decrease in Cash | (276 | ) | ||
Cash - Beginning of Period | 276 | |||
Cash - End of Period | $ | - |
See accompanying notes to financial statements.
F-20
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
Note A
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations:
The Brainy Baby Company, LLC (the "Company"), a limited liability company, was formed on July 30, 2001 under the laws of the state of Georgia and is headquartered in Suwanee, Georgia. The Company engaged in the business of selling educational DVDs, books, games, and toys for babies, toddlers and pre-schoolers both domestically and internationally through retailers under licensing agreements, as well as directly to customers primarily via internet sales.
Sale of Assets:
On September 23, 2010, as part of a corporate restructuring, the Company entered into a transaction known under Georgia law as an Assignment for the Benefit of Creditors. In conjunction with this transaction, the Company executed a Deed of Assignment (the “Agreement”) with Asset Recovery Associates, LLC (“ARA”), whereby all of the assets of the Company, including, but not limited to, all personal property, fixtures, goods, stock, inventory, equipment, furniture, furnishings, accounts receivable, bank deposits, cash, promissory notes, trade names, goodwill, contracts, claims and demands belonging to the Company, books, records, books of account, judgments, liens, and mortgages held or owned by the Company, were assigned to ARA.
Under the terms of the Agreement, ARA would have the ability to operate the Company’s business for a limited period of time in order to liquidate and maximize the value of the assets of the Company and to pay and discharge all reasonable attorney fees, expenses, costs and disbursements in connection with the execution and administration of this assignment from the proceeds of such liquidations and collections. To the extent that funds are available from the disposition of the assets of the Company, ARA will pay and discharge in full all of the Company's debts and liabilities, including interest on such debts and liabilities.
Any proceeds would have been required to be paid as follows:
(1) Creditors with valid and perfected liens on and security interest in the assets sold
(2) Taxing authorities that do not have liens on the assets sold
(3) General unsecured creditors on a pro rata basis
Any remaining funds would be returned to the Company. On the date of the agreement, management estimated the aggregate unsecured liabilities of the Company were at least $1,200,000.
F-21
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
On September 23, 2010, ARA entered into an agreement with Brainy Acquisitions, Inc. (“Brainy”), whereby Brainy purchased the assets previously assigned by the Company to ARA. The purchase price was $87,500, which was paid in cash at closing. Brainy did not assume any debt, accounts payable, contracts, agreements, commitments, or other obligations or liabilities of the Company except for certain equipment lease obligations.
Upon consummation of the sale transaction to Brainy, ARA satisfied the note payable to a bank, which had an outstanding balance of principal and interest of $349,232 at September 23, 2010, for $82,500. The Company recorded a gain on the extinguishment of debt in the amount of $266,732. The remaining balance of proceeds, or $5,000, was retained by ARA as a fee. In addition, the Company recorded a loss on the sale of assets in the amount of $658,552, which represented the write off of the carrying value of the assets of the Company.
As a result of the above transactions, the Company was left with all remaining liabilities and notes payable without any source of future revenue, operations or sources of capital. Management has indicated that they have no intention of raising any additional capital or infusing any additional cash into the business.
Going Concern:
The financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred net losses since its inception, with a members' deficit of approximately $2,054,000 as of September 30, 2010. As discussed in Note K, substantially all of the assets of the Company were sold on September 23, 2010. Management has no plans to generate any future revenues, seek additional funding, or raise additional equity for the Company.
Accounting Standards Codification:
The Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) became the sole authoritative source of generally accepted accounting principles in the United States for periods ending after September 15, 2009. The FASB ASC incorporates all authoritative accounting literature previously issued by a standard setter. Adoption of the FASB ASC had no effect on the Company’s financial position, results from operations, members’ deficit or cash flows.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates are used for, but not limited to, the allowance for doubtful accounts and inventory valuation. Actual results could differ from these estimates.
F-22
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
Revenue Recognition:
Revenue from the sale of products is recognized at the time of shipment.
The Company enters into licensing agreements whereby the licensee agrees to pay a percentage of net sales of the licensed products. Most of the agreements require the licensee to pay guaranteed minimum royalty payments upon entering into the agreement. Advanced royalty payments associated with these agreements are recorded as deferred revenue and royalties are recognized as revenue as licensees sell the licensed products.
Shipping and Handling Costs:
The Company classifies shipping and handling amounts billed to customers as product sales and shipping and handling costs as a component of cost of sales.
Income Taxes:
The Company has elected for income tax purposes to be taxed as a partnership; therefore, the taxable income or losses of the Company are passed through to the members. The income taxes are paid by the members; therefore, no provision for or benefit from income taxes is recorded in these financial statements.
Due to a required change in the applicable accounting standards, the Company adopted a new recognition threshold for income tax benefits arising from uncertain income tax positions effective January 1, 2009. Upon adoption of the new standard and in all subsequent periods, a tax benefit arising from an uncertain tax position can only be recognized for financial reporting purposes if, and to the extent that, the position is more likely than not to be sustained in an audit by the applicable taxing authority. The Company did not have any such uncertain tax positions that required adjustment or disclosure in the financial statements at September 30, 2010.
The Company is no longer subject to income tax examinations for calendar years prior to 2006.
Fair Value of Financial Instruments:
In specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the Company's principal market for the asset or liability at the measurement date for such transactions. If the Company has not an established a principal market for transactions of a particular asset or liability, fair value is determined based on the most advantageous market.
F-23
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
Valuation inputs used to determine fair value are arranged in a hierarchy that categorize the inputs into three broad levels, which are as follows:
• | Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
• | Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs. |
• | Level 3 inputs are unobservable inputs for the asset or liability. |
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
The Company’s financial instruments include cash, accounts receivable, accounts payable, notes payable and accrued liabilities. Financial instruments are reported at historical cost, which is not materially different than fair value due to the short expected duration or holding period of the assets and liabilities.
The Company’s non-financial assets consist of property and equipment and masters, which are reported at cost less accumulated depreciation and amortization and trademarks which are recorded at cost and is not amortized. Upon the occurrence of certain events, the Company is required to perform an impairment test of property and equipment. If the impairment test indicates that an impairment has occurred, the carrying value of property and equipment is reduced to its then current fair value and an impairment charge is recognized in net income. The Company has no non-financial liabilities.
Note B
Members' Deficit
The Company is composed of two members and managed exclusively by its members. A member's percentage interest in the Company is computed as a fraction, the numerator of which is the total of a member's capital account and the denominator of which is the total of all capital accounts of all members.
The rights, preferences, and privileges of the members are as follows:
Allocations:
As stated in the operating agreement, no member is subject to priority or preference with respect to other members in obtaining a return of capital contributions, distributions or allocations of the income, gains, losses, deductions, credits or other items of the Company. The profits and losses of the Company, and all items of its income, gain, loss, deduction and credit shall be allocated to the members according to each member's percentage interest. Each member shall vote on any matter submitted to the membership for approval in proportion to the member's percentage interest in the Company.
Distributions:
As stated in the operating agreement, cash from the Company's business operations, as well as cash from a sale or other disposition of LLC capital assets, may not be distributed before termination of the Company other than for payment of federal and state income tax liabilities that the Company would incur on account of the members' interest. Upon termination of the Company, distributions will be made to members in accordance with each member's percentage interest in the LLC, as decided by the majority of the members.
F-24
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
Note C
Notes Payable
Notes payable consisted of the following at September 30, 2010 (all notes were deemed by management as current due to the corporate restructuring as defined in NoteA):
Note payable to a bank, bearing interest at the prime rate plus 5%. The note payable requires payments of $725, including interest, with the remaining amount due at January 26, 2012. The note payable is personally guaranteed by a member and secured by all assets of the Company. ��The note payable was in default due to missed payments as of the date of the issuance of these financial statements and, as a result, has been classified as a current liability at September 30, 2010. | $ | 47,736 | ||
Notes payable to an individual; one bearing interest at 10%, with interest due annually on February 3 and the outstanding principal balance of $150,000 due in 2008; and one bearing interest at 20% with interest due quarterly and the outstanding principal balance of $250,000 due in 2009. Both notes payable are unsecured and are personally guaranteed by a member. The Company has accrued interest and attorney fees related to the delinquent notes payable and is currently working with the noteholder to reach a settlement agreement. | 350,000 | |||
Notes payable to a company; one bearing interest at 8%, with interest and the outstanding principal balance of $100,000 due December 28, 2011; and one bearing interest at 8%, with interest and the outstanding principal balance of $50,000 due February 28, 2012. Both notes payable are secured by all assets of the Company. | 150,000 | |||
Note payable to a member's father; unsecured, non-interest bearing and due on demand | 7,200 | |||
Total notes payable | $ | 554,936 |
Note D
Commitments
Purchase Incentive Agreement:
The Company entered into a purchasing agreement during 2006, which expired June 20, 2009. Under this agreement, the Company committed to buy a minimum of three million DVD's for a total contract incentive fee of $450,000. The Company received $150,000 of this amount at the contract date with the other $300,000 to be received contingently in two payments of $150,000 each upon the purchase of 1 million DVD's and 2 million DVD's, respectively. The purchase incentive fee was amortized as a reduction of expense over the first 3 million DVD's purchased and paid for in the amount of $.15 per DVD. If the commitment was not met after 18 months, then the full unamortized balance would become due and payable on demand. The purchase commitment was not met by the Company, and the associated lia bilities for the unamortized balance of $36,028 and $72,130 at December 31, 2009 and 2008, respectively, are included in accrued expenses.
F-25
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
Operating Leases:
The Company leases office space and warehouse and office equipment under noncancelable operating leases expiring on various dates through August 2014.
At September 30, 2010, future minimum lease payments under noncancelable operating leases were as follows:
Year Ending December 31 | ||||
2010 | $ | 59,392 | ||
2011 | 61,039 | |||
2012 | 62,735 | |||
2013 | 59,978 | |||
2014 | 56,347 | |||
$ | 299,491 |
Rent expense totaled $36,910 for the nine months ended September 30, 2010.
Note E
Concentrations
Significant Vendors:
A significant vendor is defined as one from which the Company receives at least 10% its total purchases. For the nine months ended September 30, 2010 the Company had purchases from one supplier totaling $72,832, which comprised 85% of the Company's purchases. Accounts payable included approximately $36,000 to this supplier at September 30, 2010.
Note F
Related Party Transactions
For the nine months ended September 30, 2010 the Company incurred fees in the amount of $5,145 for legal services provided by one of its members. At September 30, 2010 the outstanding fees due this member were $1,145.
The Company has a loan payable to the father of one of its members in the amount of $7,200 (See Note C).
Note G
Subsequent Events
The Company evaluated subsequent events through November 22, 2010, when these financial statements were available to be issued. The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the issuance of this report that would have a material impact on the financial statements, other than what has been disclosed in these financial statements.
F-26
THE BRAINY BABY COMPANY, LLC
FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
F-27
THE BRAINY BABY COMPANY, LLC
TABLE OF CONTENTS
PAGE | |
Financial statements: | |
Independent auditors' report | F-29 |
Balance sheets | F-30 - F-31 |
Statements of operations and members' deficit | F-32 |
Statements of cash flows | F-33- F-34 |
Notes to financial statements | F-35 - F-46 |
F-28
INDEPENDENT AUDITORS' REPORT
To the Members of
The Brainy Baby Company, LLC
We have audited the accompanying balance sheets of The Brainy Baby Company, LLC (the "Company") as of December 31, 2009 and 2008, and the related statements of operations and members' deficit, and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also 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 Brainy Baby Company, LLC as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, 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 A and Note K to the financial statements, the Company has incurred losses from inception, and on September 23, 2010, substantially all of the assets of the Company were sold. These conditions raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the events discussed in Note A and Note K.
/s/ Habif, Arogeti & Wynne, LLP
Atlanta, Georgia
October 7, 2010
October 7, 2010
F-29
THE BRAINY BABY COMPANY, LLC
BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
ASSETS | ||||||||
2009 | 2008 | |||||||
Current assets | ||||||||
Cash | $ | 276 | $ | 10,979 | ||||
Accounts receivable - trade, net of allowance for doubtful accounts of $0 and $36,268, respectively | 67,185 | 111,138 | ||||||
Inventory, net | 96,171 | 80,293 | ||||||
Prepaid expenses and other | 14,431 | 9,571 | ||||||
Total current assets | 178,063 | 211,981 | ||||||
Property and equipment, net | 92,120 | 119,505 | ||||||
Other assets | ||||||||
Intangible assets, net | 685,837 | 742,189 | ||||||
Due from member | 57,024 | 260,000 | ||||||
Total other assets | 742,861 | 1,002,189 | ||||||
Total assets | $ | 1,013,044 | $ | 1,333,675 |
See accompanying notes to financial statements.
F-30
THE BRAINY BABY COMPANY, LLC
BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
LIABILITIES AND MEMBERS' DEFICIT
2009 | 2008 | |||||||
Current liabilities | ||||||||
Cash overdraft | $ | 1,024 | $ | 15,812 | ||||
Accounts payable | 310,537 | 393,190 | ||||||
Accrued expenses | 189,725 | 185,547 | ||||||
Accrued interest | 309,667 | 249,667 | ||||||
Deferred revenue | 137,335 | 288,500 | ||||||
Lines of credit | 53,605 | 56,135 | ||||||
Notes payable | 741,970 | 749,319 | ||||||
Credit cards payable | 330,735 | 363,639 | ||||||
Other current liabilities | 36,028 | 72,130 | ||||||
Total current liabilities | 2,110,626 | 2,373,939 | ||||||
Members' deficit | (1,097,582 | ) | (1,040,264 | ) | ||||
Total liabilities and members' deficit | $ | 1,013,044 | $ | 1,333,675 |
See accompanying notes to financial statements.
F-31
THE BRAINY BABY COMPANY, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2009 | 2008 | |||||||
Revenues: | ||||||||
Product sales | $ | 511,920 | $ | 604,258 | ||||
Licensing income | 827,412 | 965,995 | ||||||
Total revenues | 1,339,332 | 1,570,253 | ||||||
Cost of goods sold | 258,782 | 301,959 | ||||||
Gross profit | 1,080,550 | 1,268,294 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 962,077 | 1,379,722 | ||||||
Depreciation and amortization | 83,738 | 103,498 | ||||||
Total operating expenses | 1,045,815 | 1,483,220 | ||||||
Income (loss) from operations | 34,735 | (214,926 | ) | |||||
Other income (expense): | ||||||||
Interest expense | (98,477 | ) | (94,590 | ) | ||||
Interest income | 6,424 | 10,460 | ||||||
Total other expense, net | (92,053 | ) | (84,130 | ) | ||||
Net loss | (57,318 | ) | (299,056 | ) | ||||
Members' deficit, beginning of year | (1,040,264 | ) | (741,208 | ) | ||||
Members' deficit, end of year | $ | (1,097,582 | ) | $ | (1,040,264 | ) |
See accompanying notes to financial statements.
F-32
THE BRAINY BABY COMPANY, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2009 | 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (57,318 | ) | $ | (299,056 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
Depreciation and amortization | 83,738 | 103,498 | ||||||
Interest added on amounts due from member | - | (10,000 | ) | |||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable - trade | 43,954 | 19,843 | ||||||
Inventory | (15,878 | ) | 61,700 | |||||
Prepaid expenses and other | (4,859 | ) | (8,489 | ) | ||||
Accounts payable | (82,655 | ) | (77,899 | ) | ||||
Accrued expenses | 4,175 | (11,021 | ) | |||||
Accrued interest | 60,000 | 40,000 | ||||||
Deferred revenue | (151,165 | ) | (174,178 | ) | ||||
Credit cards payable | (32,903 | ) | 90,253 | |||||
Other current liabilities | (36,102 | ) | (63,562 | ) | ||||
Total adjustments | (131,695 | ) | (29,855 | ) | ||||
Cash used by operating activities | (189,013 | ) | (328,911 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | - | (9,991 | ) | |||||
Payments received on amounts due from member | 202,976 | - | ||||||
Cash provided (used) by investing activities | 202,976 | (9,991 | ) | |||||
Cash flows from financing activities: | ||||||||
Net borrowings (payments) on lines of credit | (2,530 | ) | 6,955 | |||||
Proceeds from notes payable | 8,000 | 106,500 | ||||||
Principal payments on notes payable | (15,348 | ) | (17,912 | ) | ||||
Increase (decrease) in cash overdraft | (14,788 | ) | 15,812 | |||||
Cash provided (used) by financing activities | (24,666 | ) | 111,355 | |||||
Net decrease in cash | (10,703 | ) | (227,547 | ) | ||||
Cash, beginning of the year | 10,979 | 238,526 | ||||||
Cash, end of year | $ | 276 | $ | 10,979 |
See accompanying notes to financial statements.
F-33
THE BRAINY BABY COMPANY, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
2009 | 2008 | |||||||
Cash paid during the years for: Interest | $ | 31,803 | $ | 46,554 |
See accompanying notes to financial statements.
F-34
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note A
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations:
The Brainy Baby Company, LLC (the "Company"), a limited liability company, was formed on July 30, 2001 under the laws of the state of Georgia and is headquartered in Suwanee, Georgia. The Company engages in the business of selling educational DVDs, books, games, and toys for babies, toddlers and pre-schoolers both domestically and internationally through retailers under licensing agreements, as well as directly to customers primarily via internet sales.
Going Concern:
The financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred net losses since its inception, with a members' deficit of approximately $1,100,000 as of December 31, 2009. As discussed in Note K, substantially all of the assets of the Company were sold on September 23, 2010. Management has no plans to generate any future revenues, seek additional funding, or raise additional equity for the Company. The financial statements do not include any adjustments resulting from the events discussed above and in Note K.
Accounting Standards Codification:
The Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) became the sole authoritative source of generally accepted accounting principles in the United States for periods ending after September 15, 2009. The FASB ASC incorporates all authoritative accounting literature previously issued by a standard setter. Adoption of the FASB ASC had no effect on the Company’s financial position, results from operations, members’ deficit or cash flows.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates are used for, but not limited to, the allowance for doubtful accounts and inventory valuation. Actual results could differ from these estimates.
Cash:
On occasion, the Company maintains cash balances on deposit with financial institutions in excess of federally insured limits. Management continually monitors the soundness of the financial institutions and believes the exposure to loss is minimal.
F-35
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note A
Nature of Operations and Summary of Significant Accounting Principles (Continued)
Accounts Receivable:
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts.
Inventory:
Inventory is stated at the lower of cost or market and is valued using the first-in, first-out method. Provisions are made in each period for the estimated effect of obsolete and slow-moving inventories.
Property and Equipment:
Property and equipment, including leasehold improvements, are stated at cost. Expenditures for maintenance and repairs are expensed currently, while renewals and betterments that materially extend the life of an asset are capitalized. The cost of assets sold, retired, or otherwise disposed of, and the related allowance for depreciation are eliminated from the accounts, and any resulting gain or loss is recognized in the statements of operations.
Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
Furniture and equipment | 3 - 7 Years |
Vehicle | 5 Years |
Leasehold improvements | Lesser of estimated useful life or life of the lease |
F-36
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note A
Nature of Operations and Summary of Significant Accounting Principles (Continued)
Impairment of Long-Lived Assets:
Long-lived assets such as property and equipment and definite-lived intangible assets (DVD or CD master production copies, or "masters") are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. ��If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized in the amount that the carrying amount of the asset exceeds its fair value. Fair value is determined based on discounted future net cash flows associated with the use of the asset.
Indefinite Lived Intangible Assets:
Indefinite lived intangible assets are recorded at cost and consist of domestic and foreign trademarks. Trademarks are not amortized since they have indefinite lives, but instead are reviewed annually for impairment. Costs to renew trademarks and costs to update masters are expensed as incurred.
Based on the Company's estimated cost to replace the trademarks and expected future undiscounted cash flows generated by the masters, no impairment was recorded for either asset at December 31, 2009 and 2008.
Revenue Recognition:
Revenue from the sale of products is recognized at the time of shipment.
The Company enters into licensing agreements whereby the licensee agrees to pay a percentage of net sales of the licensed products. Most of the agreements require the licensee to pay guaranteed minimum royalty payments upon entering into the agreement. Advanced royalty payments associated with these agreements are recorded as deferred revenue and royalties are recognized as revenue as licensees sell the licensed products.
Shipping and Handling Costs:
The Company classifies shipping and handling amounts billed to customers as product sales and shipping and handling costs as a component of cost of goods sold.
F-37
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note A
Nature of Operations and Summary of Significant Accounting Principles (Continued)
Advertising:
The Company expenses advertising costs as incurred. Advertising expenses totaled $88,707 and $140,237 for the years ended December 31, 2009 and 2008, respectively.
Income Taxes:
The Company has elected for income tax purposes to be taxed as a partnership; therefore, the taxable income or losses of the Company are passed through to the members. The income taxes are paid by the members; therefore, no provision for or benefit from income taxes is recorded in these financial statements.
Due to a required change in the applicable accounting standards, the Company adopted a new recognition threshold for income tax benefits arising from uncertain income tax positions effective January 1, 2009. Upon adoption of the new standard and in all subsequent periods, a tax benefit arising from an uncertain tax position can only be recognized for financial reporting purposes if, and to the extent that, the position is more likely than not to be sustained in an audit by the applicable taxing authority. The Company did not have any such uncertain tax positions that required adjustment or disclosure in the financial statements at December 31, 2009.
The Company is no longer subject to income tax examinations for calendar years prior to 2006.
Fair Value of Financial Instruments:
In specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the Company's principal market for the asset or liability at the measurement date for such transactions. If the Company's has not an established a principal market for transactions of a particular asset or liability, fair value is determined based on the most advantageous market.
F-38
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note A
Nature of Operations and Summary of Significant Accounting Principles (Continued)
Valuation inputs used to determine fair value are arranged in a hierarchy that categorize the inputs into three broad levels, which are as follows:
• | Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
• | Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs. |
• | Level 3 inputs are unobservable inputs for the asset or liability. |
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.
The Company’s financial instruments include cash, accounts receivable, accounts payable, and accrued liabilities. Financial instruments are reported at historical cost, which is not materially different than fair value due to the short expected duration or holding period of the assets and liabilities.
The Company’s non-financial assets consist of property and equipment and masters, which are reported at cost less accumulated depreciation and amortization and trademarks which are recorded at cost and is not amortized. Upon the occurrence of certain events, the Company is required to perform an impairment test of property and equipment. If the impairment test indicates that an impairment has occurred, the carrying value of property and equipment is reduced to its then current fair value and an impairment charge is recognized in net income. The Company has no non-financial liabilities.
F-39
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note B
Members' Deficit
The Company is composed of two members and managed exclusively by its members. A member's percentage interest in the Company is computed as a fraction, the numerator of which is the total of a member's capital account and the denominator of which is the total of all capital accounts of all members.
The rights, preferences, and privileges of the members are as follows:
Allocations:
As stated in the operating agreement, no member is subject to priority or preference with respect to other members in obtaining a return of capital contributions, distributions or allocations of the income, gains, losses, deductions, credits or other items of the Company. The profits and losses of the Company, and all items of its income, gain, loss, deduction and credit shall be allocated to the members according to each member's percentage interest. Each member shall vote on any matter submitted to the membership for approval in proportion to the member's percentage interest in the Company.
Distributions:
As stated in the operating agreement, cash from the Company's business operations, as well as cash from a sale or other disposition of LLC capital assets, may not be distributed before termination of the Company other than for payment of federal and state income tax liabilities that the Company would incur on account of the members' interest. Upon termination of the Company, distributions will be made to members in accordance with each member's percentage interest in the LLC, as decided by the majority of the members.
Note C
Inventory
The components of inventory are as follows as of December 31:
2009 | 2008 | |||||||
Finished goods | $ | 167,026 | $ | 142,139 | ||||
Less reserve for obsolescence and slow-moving inventory | (70,855 | ) | (61,846 | ) | ||||
Net inventory | $ | 96,171 | $ | 80,293 |
F-40
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note D
Property and Equipment
Property and equipment consisted of the following at December 31:
2009 | 2008 | |||||||
Leasehold improvements | $ | 102,035 | $ | 102,035 | ||||
Furniture and equipment | 228,316 | 228,316 | ||||||
Vehicle | 5,700 | 5,700 | ||||||
336,051 | 336,051 | |||||||
Less accumulated depreciation | (243,931 | ) | (216,546 | ) | ||||
Property and equipment, net | $ | 92,120 | $ | 119,505 |
Depreciation expense for the years ended December 31, 2009 and 2008 totaled $27,386 and $45,983, respectively.
Note E
Intangible Assets
Intangible assets were comprised of the following at December 31, 2009:
Estimated life | Gross Amount | Accumulated Amortization | Net | ||||||||||
Masters | 10 years | $ | 577,280 | $ | 359,353 | $ | 217,927 | ||||||
Masters in production | 10 years | 17,719 | - | 17,719 | |||||||||
Trademarks | Indefinite | 450,191 | - | 450,191 | |||||||||
$ | 1,045,190 | $ | 359,353 | $ | 685,837 |
Intangible assets were comprised of the following at December 31, 2008:
Estimated Life | Gross Amount | Accumulated Amortization | Net | ||||||||||
Masters | 10 years | $ | 577,280 | $ | 303,001 | $ | 274,279 | ||||||
Masters in production | 10 years | 17,719 | - | 17,719 | |||||||||
Trademarks | Indefinite | 450,191 | - | 450,191 | |||||||||
$ | 1,045,190 | $ | 303,001 | $ | 742,189 |
F-41
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note E
Intangible Assets (Continued)
Amortization expense related to the masters totaled $56,352 and $57,515 for the years ended December 31, 2009 and 2008, respectively.
Estimated future amortization expense is as follows:
Year Ending December 31 | Amount | |||
2010 | $ | 53,393 | ||
2011 | 51,759 | |||
2012 | 42,154 | |||
2013 | 33,682 | |||
2014 | 22,609 | |||
Thereafter | 14,330 | |||
$ | 217,927 |
Note F
Lines of Credit
The Company had three revolving lines of credit with a financial institution as of December 31, 2009 and 2008. The credit limit in total was $60,000 with interest rates ranging from prime plus 1% to prime plus 6%. The lines of credit were secured by all assets of the business and were also personally guaranteed by a member and his wife. On January 26, 2010, the lines of credit were consolidated into a note payable in the amount of $51,684 bearing interest at the prime rate plus 5%. The note payable requires 23 payments of $725, including interest, with the remaining amount due at January 26, 2012. The note payable is personally guaranteed by a member and secured by all assets of the Company. The note payable was in default due to missed payments as of the date of the iss uance of these financial statements and, as a result, has been classified as a current liability at December 31, 2009.
F-42
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note G
Notes Payable
Notes payable consisted of the following at December 31:
2009 | 2008 | |||||||
Note payable to a bank; bearing interest at prime plus 3% with a floor of 7%; secured by all assets of the Company and personally guaranteed by a member, with principal and interest due at maturity on March 18, 2010. The note contains a material adverse change clause, which states that if such a change occurs in the Company's financial condition or the lender believes the prospect of payment of the note payable is impaired, the note payable will be considered to be in default. Payment was not made at the maturity date, and the note payable is in default. The note payable was satisfied as part of the sale of assets transaction (see Note K). | $ | 333,970 | $ | 349,319 | ||||
Notes payable to an individual; one bearing interest at 10%, with interest due annually on February 3 and the outstanding principal balance of $150,000 due in 2008; and one bearing interest at 20% with interest due quarterly and the outstanding principal balance of $250,000 due in 2009. Both notes payable are unsecured and are personally guaranteed by a member. The Company has accrued interest and attorney fees related to the delinquent notes payable and is currently working with the noteholder to reach a settlement agreement. | 400,000 | 400,000 | ||||||
Note payable due to a member's father ; unsecured, non-interest bearing and due on demand | 8,000 | - | ||||||
Total notes payable | $ | 741,970 | $ | 749,319 |
F-43
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note H
Commitments
Purchase Incentive Agreement:
The Company entered into a purchasing agreement during 2006, which expired June 20, 2009. Under this agreement, the Company committed to buy a minimum of three million DVD's for a total contract incentive fee of $450,000. The Company received $150,000 of this amount at the contract date with the other $300,000 to be received contingently in two payments of $150,000 each upon the purchase of 1 million DVD's and 2 million DVD's, respectively. The purchase incentive fee was amortized as a reduction of expense over the first 3 million DVD's purchased and paid for in the amount of $.15 per DVD. If the commitment was not met after 18 months, then the full unamortized balance would become due and payable on demand. The purchase commitment was not met by the Company, and the associated lia bilities for the unamortized balance of $36,028 and $72,130 at December 31, 2009 and 2008, respectively, are included in accrued expenses.
Operating Leases:
The Company leases office space and warehouse and office equipment under noncancelable operating leases expiring on various dates through August 2014.
At December 31, 2009, future minimum lease payments under noncancelable operating leases were as follows:
Year Ending December 31 | ||||
2010 | $ | 59,392 | ||
2011 | 61,039 | |||
2012 | 62,735 | |||
2013 | 59,978 | |||
2014 | 56,347 | |||
$ | 299,491 |
Rent expense totaled $49,098 for the years ended December 31, 2009 and 2008.
F-44
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note I
Concentrations
Significant Vendors:
A significant vendor is defined as one from which the Company receives at least 10% its total purchases. For the year ended December 31, 2009, the Company had purchases from three suppliers totaling $179,871, which comprised 86% of the Company's purchases. Accounts payable included approximately $41,000 to these suppliers at December 31, 2009.
For the year ended December 31, 2008, the Company had purchases from two suppliers totaling $160,183, which comprised 77% of the Company's purchases. Accounts payable included approximately $69,000 to these suppliers at December 31, 2008.
Significant Customer:
A significant customer is defined as one from whom at least 10% of revenue is derived. The Company had revenue from one customer totaling $666,666 in both 2009 and 2008 under a three year licensing agreement which ended December 31, 2009 and was not renewed. These revenues comprised 50% and 42% of revenues for the years ended December 31, 2009 and 2008, respectively.
Note J
Related Party Transactions
During 2009 and 2008,the Company incurred fees in the amount of $8,015 and $32,736 for legal services provided by one of its members. At December 31, 2009 and 2008, the outstanding fees due were $0 and $17,724, respectively.
The Company had a loan receivable from one of its members totaling $57,024 and $260,000, including interest accrued at 4% per year, as of December 31, 2009 and 2008, respectively. The amount of interest included in the loan receivable was $15,835 and $10,000, as of December 31, 2009 and 2008, respectively. The loan is unsecured and payments are made periodically at the option of the payee. The loan is classified as long-term since it is unlikely that the outstanding balance will be repaid within twelve months of the balance sheet date.
The Company has a loan payable to the father of one of its members in the amount of $8,000 (See Note G).
F-45
THE BRAINY BABY COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Note K
Subsequent Events
Sale of Assets:
On September 21, 2010, as part of a corporate restructuring, the Company entered into a transaction known under Georgia Law as an Assignment for the Benefit of Creditors. In conjunction with this transaction, the Company executed a Deed of Assignment (the “Agreement”) with Asset Recovery Associates, LLC (“ARA”), whereby all of the assets of the Company, including, but not limited to, all personal property, fixtures, goods, stock, inventory, equipment, furniture, furnishings, accounts receivable, bank deposits, cash, promissory notes, trade names, goodwill, contracts, claims and demands belonging to the Company, books, records, books of account, judgments, liens, and mortgages held or owned by the Company, were assigned to ARA.
Under the terms of the Agreement, ARA would have the ability to operate the Company’s business for a limited period of time in order to liquidate and maximize the value of the assets of the Company and to pay and discharge all reasonable attorney fees, expenses, costs and disbursements in connection with the execution and administration of this assignment from the proceeds of such liquidations and collections. To the extent that funds are available from the disposition of the assets of the Company, ARA will pay and discharge in full all of the Company's debts and liabilities, including interest on such debts and liabilities.
Any proceeds would have been required to be paid as follows:
(1) Creditors with valid and perfected liens on and security interest in the assets sold
(2) Taxing authorities that do not have liens on the assets sold
(3) General unsecured creditors on a pro rata basis
Any remaining funds would be returned to the Company. On the date of the agreement, management estimated the aggregate unsecured liabilities of the Company were at least $1,200,000.
On September 23, 2010, ARA entered into an agreement with Brainy Acquisitions, Inc. (“Brainy”) whereby Brainy purchased the assets previously assigned by the Company to ARA. The purchase price was $87,500, which was paid in cash at closing. Brainy did not assume any debt, accounts payable, contracts, agreements, commitments, or other obligations or liabilities of the Company except for certain equipment lease obligations.
Upon consummation of the sale transaction to Brainy, ARA satisfied the note payable to a bank, which had an outstanding balance of principal and interest of $345,576 at September 23, 2010, for $82,500. The remaining balance of proceeds, or $5,000, was retained by ARA as a fee.
As a result of the above transactions, the Company was left with all remaining liabilities and notes payable without any source of future revenue, operations or sources of capital. Management has indicated that they have no intention of raising any additional capital or infusing any additional cash into the business.
The Company evaluated subsequent events through October 7, 2010, when these financial statements were available to be issued. The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the issuance of this report that would have a material impact on the financial statements, other than what has been disclosed in these financial statements.
F-46