UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2011
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or
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________________ to __________________________
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Commission file number: 000-54344
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THE BRAINY BRANDS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE
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30-0457914
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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460 Brogdon Road, Suite 400
Suwanee, GA
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30024
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(Address of principal executive offices)
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(Zip Code)
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(678) 762-1100
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(Registrant's telephone number, including area code)
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N/A
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if smaller reporting company)
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes
o
No
x
Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date, 36,461,706 shares of common stock are issued and outstanding as of August 22, 2011.
TABLE OF CONTENTS
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Page No.
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PART I. - FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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F-1
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Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
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F-2
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Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010
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F-3
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010
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F-4
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Notes to Unaudited Consolidated Financial Statements
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F-5
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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4
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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8
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Item 4
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Controls and Procedures.
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8
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PART II - OTHER INFORMATION
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Item 1.
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Legal Proceedings.
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9
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Item 1A.
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Risk Factors.
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9
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds.
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9
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Item 3.
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Defaults Upon Senior Securities.
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9
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Item 4.
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(Removed and Reserved)
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9
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Item 5.
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Other Information.
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9
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Item 6.
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Exhibits.
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9
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements in this quarterly report 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 those risks discussed from time to time in this report and in other documents which we file with the Securities and Exchange Commission, including the risks described under “Risk Factors,” in our annual report for the year ended December 31, 2010, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this 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 the filing of this quarterly report, except as may be required under applicable securities laws.
Item 1. Financial Statements
THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010
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THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
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Consolidated Balance Sheets
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June 30, 2011
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December 31, 2010
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(unaudited)
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Assets
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Assets:
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Cash
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$
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333,997
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$
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921,711
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Restricted cash
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-
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900,000
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Accounts receivable, net of allowance for doubtful accounts of $227 and $1,547, respectively
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121,428
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83,706
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Inventory, net
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184,081
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52,184
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Prepaid expenses and other
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194,916
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86,900
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Total Current Assets
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834,422
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2,044,501
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Debt issuance costs, net
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93,883
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87,486
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Property and equipment, net
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102,934
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90,503
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Intangible assets, net
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588,949
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613,029
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Total Assets
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$
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1,620,188
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$
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2,835,519
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Liabilities and Shareholders' Deficit
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Liabilities:
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Accounts payable
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$
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283,022
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$
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196,995
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Accrued expenses
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544,353
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74,779
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Deferred revenue
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113,687
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156,378
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Other current liabilities
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40,374
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49,609
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Total Current Liabilities
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981,436
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477,761
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Convertible notes payable
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2,279,134
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1,934,178
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Derivative liabilities
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16,891,175
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905,701
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Total Long-Term Liabilities
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19,170,309
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2,839,879
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Total Liabilities
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20,151,745
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3,317,640
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Shareholders' Deficit
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Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding
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-
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-
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Common stock, $0.001 par value, 160,000,000 shares authorized, 32,699,986
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shares issued and outstanding
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32,700
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32,700
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Additional paid-in capital
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552,587
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552,587
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Accumulated deficit
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(19,116,844
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)
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(1,067,408
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)
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Total Shareholders' Deficit
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(18,531,557
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)
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(482,121
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)
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Total Liabilities and Shareholders' Deficit
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$
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1,620,188
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$
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2,835,519
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See accompanying notes to consolidated financial statements
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THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
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Consolidated Statements of Operations
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(unaudited)
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For the Three Months Ended
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For the Six Months Ended
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June 30, 2011
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June 30, 2010
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June 30, 2011
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June 30, 2010
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Revenues
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Product sales, net of discounts
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Selling, general and administrative expenses
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Depreciation and amortization
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Change in fair market value of derivative liabilities
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Total Other Income (Expense)
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Net Loss per Common Share - Basic and Diluted
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Weighted Average Number of Common Shares Outstanding Basic - Diluted
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See accompanying notes to consolidated financial statements
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THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
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Consolidated Statements of Cash Flows
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(unaudited)
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For the Six Months Ended
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June 30, 2011
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June 30, 2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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Amortization of debt issuance costs
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Amortization of debt discount
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Change in fair market value derivative liabilities
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Changes in operating assets and liabilities:
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Prepaid expenses and other
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Accounts payable and accrued expenses
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Other current liabilities
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Net Cash Used in Operating Activities
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchase of property and equipment
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Net Cash Used in Investing Activities
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Net proceeds from convertible notes
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Payments on lines of credit
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Proceeds from notes payable
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Proceeds from the release of cash restriction
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Payments received on amounts due from officer
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Net Cash Provided By Financing Activities
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Net Increase (Decrease) in Cash
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Cash - Beginning of Period
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SUPPLEMENTARY CASH FLOW INFORMATION:
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Cash Paid During the Period for:
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SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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Debt discount on convertible notes
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See accompanying notes to consolidated financial statements
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Note 1 Nature of Operations and Basis of Presentation
The Brainy Brands Company, Inc. ( “Holdings” or "Company"), (formerly known as Enter Corp.) is a Delaware corporation incorporated in 2007. On November 24, 2010, Holdings acquired Brainy Acquisitions, Inc. ( “Acquisitions”), a Delaware corporation incorporated in 2010. Acquisitions was formed on August 27, 2010 under the laws of the state of Georgia and is headquartered in Suwanee, Georgia. On September 23, 2010, Acquisitions entered into an Agreement for the Purchase and Sale of Assets of the The Brainy Baby Company, LLC (“LLC”) with Asset Recovery Associates, LLC (“ARA”) as assignee for the benefit of creditors of LLC.
LLC, a limited liability company, was formed on July 30, 2001, (Inception), under the laws of the state of Georgia and was headquartered in Suwanee, Georgia. LLC was 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.
Since Acquisitions had no previous operations and the members of LLC ultimately received the controlling interest in the Company, LLC is considered the accounting acquirer through the corporate recapitalization.
Reverse Acquisition and Recapitalization:
Public Shell Merger – Reverse Merger and Recapitalization
On November 24, 2010, the shareholders of Acquisitions entered into a share exchange with Holdings, such that Acquisitions became a wholly owned subsidiary of Holdings, in a transaction treated as a reverse acquisition. Holdings did not have any operations and majority-voting control was transferred to the prior shareholders of Acquisitions. The transaction also required a recapitalization of Acquisitions. Since the shareholders of Acquisitions acquired a controlling voting interest, it was deemed the accounting acquirer, while Holdings was deemed the legal acquirer. The historical financial statements of the Company are those of Acquisitions, and of the consolidated entities from the date of merger and subsequent.
In connection with the share exchange, Holdings purchased from the former majority shareholders 40,500,000 shares of common stock for $100,000, the shares were cancelled, and Holdings, concurrently issued 18,749,985 shares of common stock to the shareholders of Acquisitions in exchange for 100% of Acquisitions issued and outstanding stock. Upon the closing of the reverse acquisition, Acquisitions' stockholders held 57% of the issued and outstanding shares of common stock.
Private Company – Reverse Merger and Recapitalization
On September 23, 2010, Acquisitions entered into an Agreement for the Purchase and Sale of Assets of LLC with ARA, as assignee for the benefit of creditors of LLC.
Acquisitions purchased the assets previously assigned by LLC to ARA. The purchase price was $82,500, which was paid in cash at closing. Acquisitions did not assume any debt, accounts payable, contracts, agreements, commitments, or other obligations or liabilities of LLC except for certain equipment lease obligations and license agreement .
This transaction with ARA is known under Georgia law as an Assignment for the Benefit of Creditors. In conjunction with this transaction, LLC executed a Deed of Assignment (the “Agreement”) with ARA, whereby all of the assets of 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 LLC, books, records, books of account, judgments, liens, and mortgages held or owned by LLC, were assigned to ARA.
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
This transaction was accounted for as a reverse merger and recapitalization of LLC, deemed the accounting acquirer. Management determined that this was not an acquisition by Acquisitions despite the cash consideration provided. Acquisitions (deemed the legal acquirer) did not have any operations prior to this transaction and the majority-voting control was ultimately transferred to the members of LLC. The transaction also required a recapitalization of the LLC. All equity accounts have been retrospectively recasted to depict share issuances. The historical financial statements of Acquisitions are those of LLC until September 23, 2010, the date of the transaction, and of the consolidated entities subsequent to that date. During the year ended December 31, 2010, the Company recorded a gain on extinguishment of debt in the amount of $2,435,463 for all liabilities, including notes payable, accounts payable and accruals, that were not transferred from LLC as part of the ARA transaction.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the years ended December 31, 2010 and 2009. The interim results for the period ended June 30, 2011 are not necessarily indicative of results for the full fiscal year.
Note 2 Summary of Significant Accounting Policies
Use of estimates
The preparation of unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: allowance for doubtful accounts, inventory obsolescence reserve, the fair value of share-based payments, fair value of derivative liabilities, estimates of the probability and potential magnitude of contingent liabilities and the valuation allowance for deferred tax assets due to continuing operating losses.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.
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.
Cash
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2011 and December 31, 2010, respectively.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The United States Congress has temporarily increased the Federal Deposit Insurance Corporation (FDIC) deposit insurance from $100,000 to $250,000 per depositor. Cash balances at times may exceed federally insured limits.
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Accounts receivable and allowance for doubtful accounts
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 using the first-in, first-out (FIFO) valuation method. Provisions are made for the estimated effect of obsolete and slow-moving inventories.
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Finished goods
|
|
$
|
256,275
|
|
|
$
|
148,866
|
|
|
Less reserve for obsolescence and slow moving inventory
|
|
|
(72,194
|
)
|
|
|
(96,682
|
)
|
|
|
|
$
|
184,081
|
|
|
$
|
52,184
|
|
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method once placed in service. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized. Repairs and maintenance costs are expensed as incurred. The estimated useful lives of assets are as follows:
Leasehold improvements Lesser of estimated useful life or life of the lease
Furniture and equipment 3 - 7 years
Vehicles 5 years
Debt Issuance Costs and Debt Discount
These items are amortized over the life of the related debt to interest expense using the straight line method which approximates the interest method. If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share of the unamortized portion of these amounts will be immediately expensed.
Fair Value of Financial Instruments
The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, are carried at cost, which approximates their fair value because of the short-term nature of these financial instruments.
For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Derivative Financial Instruments
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the binomial option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, the derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments, such as warrants, are also valued using the binomial option-pricing model. At June 30, 2011 and December 31, 2010, respectively, the Company had derivative liabilities in the amounts of $16,891,175 and $905,701.
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 undiscounted 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.
Based on the Company's expected future undiscounted cash flows generated by the masters, no impairment was recorded at June 30, 2011 and 2010, respectively.
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, or more frequently if there are material changes in circumsances, for impairment. Costs to renew trademarks are expensed as incurred.
Revenue recognition
The Company recognizes 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 right of return for products. Product sales are recognized upon shipment, where risk and title to the Company’s inventory passes to the customer.
The Company also 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 over the period of the agreement based on the greater of the monthly minimums or the licensees’ sales of the licensed products.
Cost of sales
Cost of sales represents costs directly related to the production and manufacturing of the Company’s products. Costs include product development, freight, packaging and print production costs. Cost of sales also represent licensing fees in accordance with a licensing contract with a related party.
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
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.
Advertising
Costs incurred for producing and communicating advertising for the Company are charged to operations as incurred as follows:
|
Three Months Ended
June 30, 2011
|
|
|
Three Months Ended
June 30, 2010
|
|
|
Six Months Ended
June 30, 2011
|
|
|
Six Months Ended
June 30, 2010
|
|
|
$
|
1,584,445
|
|
|
$
|
10,000
|
|
|
$
|
1,879,703
|
|
|
$
|
31,801
|
|
Share-based payments
Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments are recorded in cost of sales or general and administrative expense in the consolidated statements of operations, depending on the nature of the services provided.
Earnings per share
In accordance with accounting guidance now codified as FASB ASC Topic 260,
“Earnings per Share,”
basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from the assumed conversion of convertible notes, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
The Company had the following common stock equivalents at June 30, 2011:
|
2010 Convertible notes – face amount of $2,806,489, conversion price of $0.40
|
|
|
7,016,222
|
|
|
2011 Convertible notes – face amount of $1,500,000, conversion price of $0.40
|
|
|
3,750,000
|
|
|
Common stock warrants, conversion price of $0.60 (Series “A”)
|
|
|
12,641,222
|
|
|
Common stock warrants, conversion price of $1.20 (Series “B”)
|
|
|
12,641,222
|
|
|
Total common stock equivalents
|
|
|
36,048,666
|
|
The Company had no common stock equivalents at June 30, 2010.
In connection with the reverse acquisition and recapitalization, all share and per share amounts have been retroactively restated.
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Note 3 Going Concern and Liquidity
As reflected in the accompanying unaudited consolidated financial statements, the Company incurred a loss of $18,049,436 and net cash used in operations of $2,930,514 for the six months ended June 30, 2011; and a shareholders’ deficit of $18,531,557 at June 30, 2011.
The ability of the Company to continue as a going concern is dependent on management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term 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 Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.
The Company believes that the utilization of new marketing initiatives, which includes signing up new distributors and a national broker network, and production and distribution of a direct to consumer marketing plan, will allow for increased awareness resulting in additional sales that will provide future positive cash flows. However, sales to date have been nominal.
The accompanying consolidated 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.
Note 4 Property and Equipment
Property and equipment consisted of the following:
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Leasehold improvements
|
|
$
|
103,195
|
|
|
$
|
103,195
|
|
|
Furniture and equipment
|
|
|
280,424
|
|
|
|
253,862
|
|
|
Vehicle
|
|
|
5,700
|
|
|
|
5,700
|
|
|
|
|
|
389,320
|
|
|
|
362,757
|
|
|
Less accumulated depreciation
|
|
|
(286,385
|
)
|
|
|
(272,254
|
)
|
|
Property and equipment, net
|
|
$
|
102,934
|
|
|
$
|
90,503
|
|
Depreciation expense for the six months ended June 30, 2011 and 2010 totaled $14,131 and $13,692, respectively.
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Note 5 Intangible Assets
Intangible assets were comprised of the following at June 30, 2011:
|
|
Estimated life
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Masters
|
10 years
|
|
$
|
575,209
|
|
|
$
|
436,826
|
|
|
$
|
138,383
|
|
|
Trademarks
|
Indefinite
|
|
|
450,566
|
|
|
|
-
|
|
|
|
450,566
|
|
|
|
|
|
$
|
1,025,775
|
|
|
$
|
436,826
|
|
|
$
|
588,949
|
|
Intangible assets were comprised of the following at December 31, 2010:
|
|
Estimated life
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Masters
|
10 years
|
|
$
|
575,209
|
|
|
$
|
412,746
|
|
|
$
|
162,463
|
|
|
Trademarks
|
Indefinite
|
|
|
450,566
|
|
|
|
-
|
|
|
|
450,566
|
|
|
|
|
|
$
|
1,025,755
|
|
|
$
|
412,746
|
|
|
$
|
613,029
|
|
Amortization expense related to the masters totaled $24,080 and $26,697 for the six months ended June 30, 2011 and 2010, respectively.
Note 6 Debt
|
(A)
|
2010 Convertible Promissory Notes and Warrants
|
Terms of Notes
On November 24, 2010, the Company completed a secured convertible notes and warrants offerings (“Notes”). The Notes are secured by all assets of the Company and mature on November 24, 2012. The Notes bear interest at a rate of 10% per annum and are payable semi-annually in arrears commencing March 31, 2011 and upon maturity (as of June 30, 2011, no interest had been paid). The principal of the Notes was $2,806,489 and the gross proceeds raised were $2,806,489. The Company paid $91,290 in debt issuance costs. The Notes contained the following features:
|
i.
|
Conversion price at issuance: $0.40 per share of common stock
|
|
ii.
|
Registration rights – the Company is required to file a registration statement within 60 days of a written request of holders of more than 50% of the conversion shares. If the Company fails to file such registration statement, the Company will incur liquidated damages of 2% of the aggregate amount raised in the offering for each 30 days of delinquency. The maximum liquidated damages are capped at 12.0% of the aggregate amount raised in the offering.
|
|
iii.
|
Warrants - The Company also issued the Note holders one stock purchase warrant with a maturity of 5 years and a $0.60 exercise price for each convertible share (7,016,222 warrants)and one stock purchase warrant with a maturity of 5 years and a $1.20 exercise price for each convertible share (7,016,222 warrants).
|
|
iv.
|
Full ratchet provision – The Notes contain a provision in which the conversion price will be reduced in any event the Company issues any security or debt instrument with a lower consideration per share in any future offering.
|
|
v.
|
$900,000 of the cash proceeds was restricted by the investors and must be utilized for investor relation purposes. For purposes of cash flow presentation, the restriction was netted with the gross proceeds raised.
|
|
(B)
|
2011 Convertible Promissory Notes and Warrants
|
On April 18, 2011 and May 20, 2011, the Company completed a secured convertible notes and warrants offerings (“2011 Notes”). The 2011 Notes are secured by all assets of the Company and mature on April 18, 2013 and May 20, 2013. The Notes bear interest at a rate of 10% per annum. The principal of the Notes was $1,500,000 ($750,000 was sold and issued on April 18, 2011 and $750,000 was sold and issued on May 20, 2011). The Company paid $32,500 in debt issuance costs. The Notes contained the following features:
|
i.
|
Conversion price at issuance: $0.40 per share of common stock
|
|
ii.
|
Registration rights – the Company is required to file a registration statement within 60 days of a written request of holders of more than 50% of the conversion shares. If the Company fails to file such registration statement, the Company will incur liquidated damages of 2% of the aggregate amount raised in the offering for each 30 days of delinquency. The maximum liquidated damages are capped at 12.0% of the aggregate amount raised in the offering.
|
|
iii.
|
Warrants - The Company also issued the Note holders one stock purchase warrant with a maturity of 5 years and a $0.60 exercise price for each convertible share (5,625,000 warrants)and one stock purchase warrant with a maturity of 5 years and a $1.20 exercise price for each convertible share (5,625,000 warrants).
|
|
iv.
|
Full ratchet provision – The Notes contain a provision in which the conversion price will be reduced in any event the Company issues any security or debt instrument with a lower consideration per share in any future offering.
|
|
v.
|
$500,000 of the cash proceeds was restricted by the investors and must be utilized for investor relation purposes. For purposes of cash flow presentation, the restriction was netted with the gross proceeds raised. The entire $500,000 was released from restriction during the period.
|
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Derivative Liabilities
In connection withASC 815, “
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock
,” the Company determined that the embedded conversion feature and the warrant issuances (ratchet down of exercise price based upon lower exercise price in future offerings) are not indexed to the Company’s own stock and, therefore, is an embedded derivative financial liability (the “Embedded Derivative”), which requires bifurcation and separate accounting.
The Company measured the fair value of the derivative liabilities using a binomial lattice valuation model.
The fair value of the derivative liabilities is summarized as follow:
|
Fair value at the issuance dates for conversion feature and warrants issued on the 2010 Convertible Promissory Notes and Warrant Offering
|
|
$
|
918,885
|
|
|
Mark to market adjustments for the year ended December 31, 2010:
|
|
|
(13,184
|
)
|
|
Derivative liabilities balance at December 31, 2010
|
|
$
|
905,701
|
|
|
Fair value at the issuance dates for conversion feature and warrants issued on the 2011 Convertible Promissory Notes and Warrant Offering
|
|
|
14,086,355
|
|
|
Mark to market adjustments for the six months ended June 30, 2011:
|
|
|
1,899,119
|
|
|
Derivative liabilities balance at June 30, 2011
|
|
$
|
16,891,175
|
|
The Company recorded the fair value of the derivative liabilities as a debt discount and is amortizing the discount over the life of the Notes on a straight-line basis.
The fair value of the derivative liabilities at issuance and at each mark to market assessment were based upon the following management assumptions:
|
Exercise price
|
$0.40 - $1.20
|
|
Expected dividends
|
0%
|
|
Expected volatility
|
62.5% - 99.7%
|
|
Expected term: conversion feature
|
2 years
|
|
Expected term: warrants
|
5 years
|
|
Suboptimal exercise factor
Risk free interest rate
|
1.25
0.45% - 2.24%
|
In connection with raising convertible debt during 2010 and 2011, the Company incurred legal fees in the amount of $91,290 and $32,500. The Company is amortizing the issuance costs over the life of the debt.
During the six months ended June 30, 2011, the Company amortized $26,104 of the debt issuance costs.
Note 7 Fair Value
The Company has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy specified by generally accepted accounting principles.
The levels of fair value hierarchy are as follows:
|
|
●
|
Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;
|
|
|
●
|
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and
|
|
|
●
|
Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
|
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.
The following are the major categories of liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2011, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
June 30, 2011:
|
|
|
Level 1:
Quoted Prices in Active Markets for Identical Liabilities
|
|
|
Level 2:
Significant Other Observable Inputs
|
|
|
Level 3:
Significant Unobservable Inputs
|
|
|
Total at June 30, 2011
|
|
|
Derivative Liabilities
|
|
$
|
-
|
|
|
$
|
16,891,175
|
|
|
$
|
-
|
|
|
$
|
16,891,175
|
|
December 31, 2010:
|
|
|
Level 1:
Quoted Prices in Active Markets for Identical Liabilities
|
|
|
Level 2:
Significant Other Observable Inputs
|
|
|
Level 3:
Significant Unobservable Inputs
|
|
|
Total at December 31, 2010
|
|
|
Derivative Liabilities
|
|
$
|
-
|
|
|
$
|
905,701
|
|
|
$
|
-
|
|
|
$
|
905,701
|
|
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Note 8 Shareholders’ Deficit
On April 4, 2011, The Brainy Brands Company, Inc. filed a certificate of amendment to its certificate of incorporation with the Secretary of State of Delaware, pursuant to which, upon filing, (i) the Company’s number of authorized shares of common stock increased from 100,000,000 to 160,000,000, and (ii) the Company became authorized to issue up to 10,000,000 shares of blank check preferred stock.
From inception to September 23, 2010, the Company was an LLC and was 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.
There were no stock issuances during the six months ended June 30, 2011 and 2010.
The following is a summary of the Company’s warrant activity:
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2010
|
|
|
14,032,444
|
|
|
$
|
0.90
|
|
|
Exercisable – December 31, 2010
|
|
|
14,032,444
|
|
|
$
|
0.90
|
|
|
Granted
|
|
|
11,250,000
|
|
|
$
|
0.90
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
Outstanding – June 30, 2011
|
|
|
25,282,444
|
|
|
$
|
0.90
|
|
|
Exercisable – June 30, 2011
|
|
|
25,282,444
|
|
|
$
|
0.90
|
|
|
|
Warrants Outstanding
|
|
Warrants Exercisable
|
|
Range of
exercise price
|
Number
Outstanding
|
Weighted Average
Remaining Contractual Life (in years)
|
Weighted Average
Exercise Price
|
Number
Exercisable
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
$0.60 - $1.20
|
25,282,444
|
4.77 years
|
$0.90
|
14,032,044
|
$0.90
|
At June 30, 2011 and December 31, 2010, the total intrinsic value of warrants outstanding and exercisable was $7,827,558 and $0, respectively.
The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
Litigations, Claims and Assessments
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
Note 9 Related Party Transactions
|
(1)
|
Lease-License Agreement
|
The Company entered into a perpetuity agreement with an entity controlled by the Chief Creative Officer on January 1, 2006. The Company obtained distribution rights of certain videos created by the counter-party. The Company has full rights to distribute and sell such product. The Company agreed to pay $0.50/per unit sold with a minimum monthly payment of $2,750.
During the six months ended June 30, 2011 and 2010, the Company accrued $16,500 in both periods relating to this agreement.
Note 10 Subsequent Events
During the period July 1, 2011 to August 22, 2011, warrant holders cash-less exercised warrants into 3,761,720 shares of the Company’s common stock.
On August 11, 2011, The Brainy Brands Company, Inc. (the “Company”) entered into a subscription agreement (the “Subscription Agreement”) with accredited investors (the “Investors”). Pursuant to the Subscription Agreement, on August 11, 2011, the Company issued and sold to the Investors, convertible promissory notes (the “Notes”) in the aggregate principal amount of $220,000 (the “Private Placement”). The Notes are secured by all of the assets of the Company. The Notes are 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, or in the event of certain subsequent issuances by the Company of common 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 September 30, 2011 and upon maturity. Pursuant to the Private Placement, the Company issued to the Investors warrants to purchase 30 shares of common stock (the “Warrants”) for each $4.00 principal amount of Notes, such that the Company issued an aggregate of 1,650,000 Warrants. The Warrants have a five-year term, may be exercised on a cashless basis, and have an exercise price of $0.60, subject to adjustment in the event of stock splits, stock dividends, 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.
A second closing under the Subscription Agreement may occur (the “Second Closing”), subject to certain conditions including the consent of the Investors, within 45 days after the initial closing of the Private Placement, for additional principal amount of up to the balance of $2,400,000 in Notes. If such Second Closing occurs, the Company will issue Notes and Warrants on the same terms and conditions as the Private Placement. A third closing under the Subscription Agreement may occur (the “Third Closing”), subject to certain conditions including the consent of the Investors, within 60 days after the Second Closing, for additional principal amount of up to the balance of $2,400,000 in Notes. If such Third Closing occurs, the Company will issue Notes and Warrants on the same terms and conditions as the Private Placement.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. We generally use words such as “believe,” “may,” “could,” “will,” “intend,” “expect,” “anticipate,” “plan,” and similar expressions to identify forward-looking statements, including statements regarding our ability to continue to create innovative technology products, our ability to continue to generate new business based on our sales and marketing efforts, referrals and existing relationships, our financing strategy and ability to access the capital markets and other risks discussed in our Risk Factor section included in our Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission.
Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
Plan of Operation
Brainy Acquisitions, Inc., the operating subsidiary of The Brainy Brands Company 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, through its operating subsidiary, 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 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 and, distribution channels in China, Asia and Europe, our goal is to become a market leader in preschool education and early childhood development products.
Results of Operation
Summary Statements of Operations for the Six Months Ended June 30, 2011 and 2010 (unaudited)
|
|
|
Six months ended
|
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
Revenue – net of discounts
|
|
$
|
313,368
|
|
|
$
|
219,037
|
|
|
Gross Profit
|
|
$
|
208,606
|
|
|
$
|
157,013
|
|
|
Operating Expenses
|
|
$
|
3,303,559
|
|
|
$
|
470,909
|
|
|
Other Expenses
|
|
$
|
(14,954,483
|
)
|
|
$
|
(24,724
|
)
|
|
Net Loss
|
|
$
|
(18,049,436
|
)
|
|
$
|
(338,620
|
)
|
|
Loss per Share – Basic and Diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.03
|
)
|
For the six months ended June 30, 2011 and 2010, the Company reported a net loss of $(18,049,436), or $(0.55) per share and net loss of $(338,620) or $(0.03) per share, respectively. The change in net loss between the six months ended June 30, 2011 and 2010 was primarily attributable to following significant events:
|
●
|
During the year ended December 31, 2010 the Company’s management team was focused on a capital raise which included recapitalizing the Company with a public shell corporation. Due to the limited number of management personnel, considerable time and effort was shifted from the selling process toward reverse merger and recapitalization process. The transaction closed in November 2010. As a result, the Company experienced limited sales during the six months ended June 30, 2010.
|
|
●
|
The increase in total revenues for the six months ended June 30, 2011 as compared to the comparable six months ended June 30, 2010 was a result of both an increase in product sales as well as an increase in licensing income. The Company completed a capital raise during the fourth quarter of 2010. The company reorganized the sales efforts, further developed and enhanced the product line, and has started to experience results from this effort.
|
|
●
|
Gross profit percentage for the six months ended June 30, 2011 as compared to the comparable six months ended June 30, 2010 decrease as a result of the Company selling old aged product in 2010 with a lower cost basis as compared to the new products sold in 2011.
|
|
●
|
Operating expenses increased considerably from $470,909 for the six months ended June 30, 2010 to $3,303,559 for the comparable six months ended June 30, 2011. The increase is primarily attributable to the Company exhausting resources marketing the product line, increased costs associated with running a public company, and considerable expenses incurred developing an investor relations campaign.
|
|
●
|
Other income (expenses) – net increased significantly, primarily due to the increase in interest expense associated with the convertible notes issued during November of 2010 and April and May 2011. In addition, the Company incurred significant fair value expenses associated with the recognition of the derivative liabilities at the time the convertible notes were issued and mark to market adjustments of the embedded derivatives.. The other expenses were offset by legal settlement income.
|
Summary Statements of Operations for the Three Months Ended June 30, 2011 and 2010 (unaudited)
|
|
|
Three months ended
|
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
Revenue – net of discounts
|
|
$
|
216,324
|
|
|
$
|
101,586
|
|
|
Gross Profit
|
|
$
|
143,697
|
|
|
$
|
76,922
|
|
|
Operating Expenses
|
|
$
|
1,876,496
|
|
|
$
|
223,101
|
|
|
Other Expenses
|
|
$
|
(14,836,988
|
)
|
|
$
|
(14,950
|
)
|
|
Net Loss
|
|
$
|
(16,569,787
|
)
|
|
$
|
(161,129
|
)
|
|
Loss per Share – Basic and Diluted
|
|
$
|
(0.51
|
)
|
|
$
|
(0.01
|
)
|
For the three months ended June 30, 2011 and 2010, the Company reported a net loss of $(16,569,787), or $(0.51) per share and net loss of $(161,129) or $(0.01) per share, respectively. The change in net loss between the three months ended June 30, 2011 and 2010 was primarily attributable to following significant events:
|
●
|
During the year ended December 31, 2010 the Company’s management team was focused on a capital raise which included recapitalizing the Company with a public shell corporation. Due to the limited number of management personnel, considerable time and effort was shifted from the selling process toward reverse merger and recapitalization process. The transaction closed in November 2010. As a result, the Company experienced limited sales during the three months ended June 30, 2010.
|
|
●
|
Upon completion of the recapitalization, the Company reorganized the sales efforts, further developed and enhanced the product line, and has started to experience results from this effort. As a direct result of these efforts, the Company has experienced an increase in revenue during the three months ended June 30, 2011 as compared to the comparable three months ended June 30, 2010.
|
|
●
|
Operating expenses increased considerably from $223,101 for the three months ended June 30, 2010 to $1,876,496 for the comparable three months ended June 30, 2011. The increase is primarily attributable to the Company exhausting resources marketing the product line, increased costs associated with running a public company, and considerable expenses incurred developing an investor relations campaign.
|
|
●
|
Other income (expenses) – net increased significantly, primarily due to the increase in interest expense associated with the convertible notes issued during November of 2010 and April and May 2011 In addition, the Company incurred significant fair value expenses associated with the recognition of the derivative liabilities at the time the convertible notes were issued and mark to market adjustments of the embedded derivatives.
|
Liquidity and Capital Resources
Going Concern: As shown in the accompanying financial statements, the Company incurred a net loss of $(18,049,436) during the six months ended June 30, 2011, and as of that date, the Company had a shareholders’ deficit of $18,531,557. Those factors raise substantial doubt about the Company’s ability to continue as a going concern. Management of the Company plans to address this concern by doing the following:
|
●
|
Raising additional capital through convertible note offerings or other equity financing
|
|
●
|
Launch of new marketing and awareness campaign
|
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.
The following table summarizes total current assets, liabilities and working capital at June 30, 2011 compared to December 31, 2010.
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Increase/Decrease
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
834,422
|
|
|
$
|
2,044,501
|
|
|
$
|
(1,210,079
|
)
|
|
Current Liabilities
|
|
$
|
981,436
|
|
|
$
|
477,761
|
|
|
$
|
(503,675
|
)
|
|
Working Capital
|
|
$
|
(147,014)
|
|
|
$
|
1,566,740
|
|
|
$
|
(1,713,754
|
)
|
As June 30, 2011, we had a working capital deficit of $147,014 as compared to working capital of $1,566,740 at December 31, 2010, a decrease of $(1,713,754). The decrease is primarily attributable to the Company exhausting significant capital in marketing and branding efforts as well as establishing an investor relations program. The Company raised significant capital in November 2010, April 2011 and May 2011, but the proceeds have been exhausted in operating activities.
Net cash used in operating activities for the six months ended June 30, 2011 and 2010 was $(2,930,514) and $(358,730), respectively.
Net cash used for investing activities for the six months ended June 30, 2011 and 2010 was $(24,700) and $(-), respectively. The Company purchased trade booth equipment during the six months ended June 30, 2011.
Net cash provided by financing activities for the six months ended June 30, 2011 was $2,367,500 as compared to $358,807 for the six months ended June 30, 2010.
The Company continues to explore potential expansion opportunities in the industry in order to boost sales, while leveraging distribution systems to consolidate lower costs. The Company needs to continue to raise money in order execute the business plan.
Financing
On April 18, 2011 and May 20, 2011, The Brainy Brands Company, Inc. entered into a subscription agreement (the “Subscription Agreement”) with accredited investors (the “Investors”). Pursuant to the Subscription Agreement, on April 18, 2011 and May 20, 2011, the Company issued and sold to the Investors, convertible promissory notes (the “Notes”) in the aggregate principal amount of $750,000 for each raise (the “Private Placement”). The Notes are secured by all of the assets of the Company. The Notes are 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, or in the event of certain subsequent issuances by the Company of common 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 September 30, 2011 and upon maturity. Pursuant to the Private Placement, the Company issued to the Investors 15 Class A Warrants and 15 Class B Warrants (collectively, the “Warrants”) to purchase common stock for each $4.00 principal amount of Notes, such that the Company issued an aggregate of 2,812,500 Class A Warrants and 2,812,500 Class B Warrants. The Warrants 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, 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.
On August 11, 2011, The Brainy Brands Company, Inc. (the “Company”) entered into a subscription agreement (the “Subscription Agreement”) with accredited investors (the “Investors”). Pursuant to the Subscription Agreement, on August 11, 2011, the Company issued and sold to the Investors, convertible promissory notes (the “Notes”) in the aggregate principal amount of $220,000 (the “Private Placement”). The Notes are secured by all of the assets of the Company. The Notes are 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, or in the event of certain subsequent issuances by the Company of common 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 September 30, 2011 and upon maturity. Pursuant to the Private Placement, the Company issued to the Investors warrants to purchase 30 shares of common stock (the “Warrants”) for each $4.00 principal amount of Notes, such that the Company issued an aggregate of 1,650,000 Warrants. The Warrants have a five-year term, may be exercised on a cashless basis, and have an exercise price of $0.60, subject to adjustment in the event of stock splits, stock dividends, 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.
A second closing under the Subscription Agreement may occur (the “Second Closing”), subject to certain conditions including the consent of the Investors, within 45 days after the initial closing of the Private Placement, for additional principal amount of up to the balance of $2,400,000 in Notes. If such Second Closing occurs, the Company will issue Notes and Warrants on the same terms and conditions as the Private Placement. A third closing under the Subscription Agreement may occur (the “Third Closing”), subject to certain conditions including the consent of the Investors, within 60 days after the Second Closing, for additional principal amount of up to the balance of $2,400,000 in Notes. If such Third Closing occurs, the Company will issue Notes and Warrants on the same terms and conditions as the Private Placement.
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 consolidated financial position or results of operations.
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would have any effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
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 consolidated financial statements have been prepared assuming we are a “going concern”. No adjustment has been made in the consolidated financial statements which could result should we be unable to continue as a going concern.
Share-Based Compensation - GAAP requires public companies to expense employee share-based payments (including options, warrants, 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.
Derivative Financial Instruments - Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses a binomial option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the binomial option-pricing model.
Debt Issuance Costs and Debt Discount -These items are amortized over the life of the debt to interest expense using the straight line method which approximates the interest method. If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share of these amounts is immediately expensed.
Revenue recognition - The Company recognizes 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 right of return for products. Product sales are recognized upon shipment, where risk and title to the Company’s inventory passes to the customer.
The Company also 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 over the period of the agreement based on the greater of the monthly minimums of the licensees’ sales of 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.
Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for a smaller reporting company.
Item 4.
Controls and Procedures.
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our Chief Executive Officer (“CEO”), who also serves as the Company’s Principal Financial Officer (“PFO”), to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management designed the disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.
We carried out an evaluation, under the supervision and with the participation of our management, including our CEO and PFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are not effective due to the material weaknesses in our internal controls identified in our Annual Report on Form 10-K for the year ended December 31, 2010.
We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, including:
(1) We will revise processes to provide for a greater role of independent board members in the oversight and review until such time that we are adequately capitalized to permit hiring additional personnel to address segregation of duties issues, ineffective controls over the revenue cycle and insufficient supervision and review by our corporate management.
(2) We will continue to update the documentation of our internal control processes, including formal risk assessment of our financial reporting processes.
We intend to consider the results of our remediation efforts and related testing as part of our year-end 2011 assessment of the effectiveness of our internal control over financial reporting.
Subsequent to December 31 2010, we have undertaken the following steps to address these deficiencies:
● Continued the development and documentation of internal controls and procedures surrounding the financial reporting process, primarily through the use of account reconciliations, and supervision.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no legal proceedings to which the Company or any of its property is the subject.
Item 1A. Risk Factors.
Not applicable to a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved)
Item 5. Other Information.
None.
Item 6. Exhibits.
|
No.
|
|
Description
|
|
31.1
|
|
Rule 13a-14(a)/ 15d-14(a) Certification of Principal Executive Officer and Principal Financial Officer
|
|
|
|
|
|
32.1
|
|
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
The Brainy Brands Company, Inc.
|
|
|
|
|
|
|
|
Date: August 23, 2011
|
By:
|
/s/ John Benfield
|
|
|
|
|
John Benfield
|
|
|
|
|
Chief Executive Officer (principal executive officer, principal financial officer, and principal accounting officer)
|
|
|
|
|
|
|
10
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