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EX-31.2 - EXHIBIT 32.1 - ENTER CORPex321.htm
EX-31.1 - EXHIBIT 31.1 - ENTER CORPex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q /A
(Amendment No. 1)
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

or

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________________ to __________________________
 
Commission file number: 000-54344

THE BRAINY BRANDS COMPANY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
 
30-0457914
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

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)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

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.

Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
 
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  o No x
 
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.
 
 
1

 
 

Explanatory Note

This Amendment No. 1 to the Quarterly Report on Form 10-Q (the "Form 10-Q") of The Brainy Brands Company, Inc. for the quarterly period ended June 30, 2011, filed with the Securities and Exchange Commission on August 23, 2011, is being filed to (i) make certain immaterial reclassifications and amendments to the Statements of Operations and Statements of Cash Flows, and (ii) furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 to the Form 10-Q provides the financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language).
 
No other changes have been made to the Form 10-Q.  This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and, except as set forth above, does not modify or update in any way disclosures made in the original Form 10-Q.
 
Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
2

 
 
Item 1. Financial Statements



 
THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010
 
 
 
 
 
 
 
 
 
 
 
F - 1

 
 
 
THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
 
Consolidated Balance Sheets
 
             
             
   
June 30, 2011
   
December 31, 2010
 
   
(unaudited)
       
Assets
           
             
Assets:
           
Cash
  $ 333,997     $ 921,711  
Restricted cash
    -       900,000  
Accounts receivable, net of allowance for doubtful accounts of $227 and $1,547, respectively
    121,428       83,706  
Inventory, net
    184,081       52,184  
Prepaid expenses and other
    194,916       86,900  
Total Current Assets
    834,422       2,044,501  
                 
Debt issuance costs, net
    93,883       87,486  
Property and equipment, net
    102,934       90,503  
Intangible assets, net
    588,949       613,029  
                 
Total Assets
  $ 1,620,188     $ 2,835,519  
                 
Liabilities and Shareholders' Deficit
               
                 
Liabilities:
               
Accounts payable
  $ 283,022     $ 196,995  
Accrued expenses
    544,353       74,779  
Deferred revenue
    113,687       156,378  
Other current liabilities
    40,374       49,609  
Total  Current Liabilities
    981,436       477,761  
                 
Convertible notes payable
    2,279,134       1,934,178  
Derivative liabilities
    16,891,175       905,701  
Total Long-Term Liabilities
    19,170,309       2,839,879  
                 
Total Liabilities
    20,151,745       3,317,640  
                 
                 
Shareholders' Deficit
               
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none  issued and outstanding
    -       -  
Common stock, $0.001 par value, 160,000,000 shares authorized, 32,699,986
               
shares issued and outstanding
    32,700       32,700  
Additional paid-in capital
    552,587       552,587  
Accumulated deficit
    (19,116,844 )     (1,067,408 )
Total Shareholders' Deficit
    (18,531,557 )     (482,121 )
                 
Total Liabilities and Shareholders' Deficit
  $ 1,620,188     $ 2,835,519  
 
See accompanying notes to consolidated financial statements
 
F - 2

 
 
 
THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
 
Consolidated Statements of Operations
 
(unaudited)
 
 
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
                         
Revenues
                       
Product sales, net of discounts
 
$
168,883
   
$
78,326
   
$
232,357
   
$
154,019
 
Licensing income
   
47,441
     
23,260
     
81,011
     
65,018
 
Total Revenues
   
216,324
     
101,586
     
313,368
     
219,037
 
                                 
Cost of Sales
   
72,627
     
24,664
     
104,762
     
62,024
 
                                 
Gross Profit
   
143,697
     
76,922
     
208,606
     
157,013
 
                                 
Operating Expenses
                               
Selling, general and administrative expenses
   
1,870,002
     
202,906
     
3,265,348
     
430,520
 
Depreciation and amortization
   
6,494
     
20,195
     
38,211
     
40,389
 
Total Operating Expenses
   
1,876,496
     
223,101
     
3,303,559
     
470,909
 
                                 
Loss from Operations
   
(1,732,799
)
   
(146,179
)
   
(3,094,953
)
   
(313,896
)
                                 
Other Income (Expense)
                               
Legal settlement income
   
17
     
-
     
60,017
     
-
 
Change in fair market value of derivative liabilities
   
(1,906,504
)
   
-
     
(1,899,119
)
   
-
 
Derivative expense
   
(12,586,255
)    
-
     
(12,586,255
)
   
-
 
Interest income
   
4
     
602
     
311
     
1,704
 
Interest expense
   
(344,250
)
   
(15,552
)
   
(529,437
)
   
(26,428
)
                                 
Total Other Income (Expense)
   
(14,836,988
)
   
(14,950
)
   
(14,954,483
)
   
(24,724
)
                                 
Net Loss
 
$
(16,569,787
)
 
$
(161,129
)
 
$
(18,049,436
)
 
$
(338,620
)
                                 
Net Loss per Common Share - Basic and Diluted
 
$
(0.51
)
 
$
(0.01
)
 
$
(0.55
)
 
$
(0.03
)
                                 
Weighted Average Number of Common Shares Outstanding Basic - Diluted
   
32,699,986
     
11,224,995
     
32,699,986
     
11,224,995
 
 
See accompanying notes to consolidated financial statements
 
 
 
F - 3

 
 
 
THE BRAINY BRANDS COMPANY, INC. AND SUBSIDIARY
 
Consolidated Statements of Cash Flows
 
(unaudited)
 
 
 
   
For the Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(18,049,436
)
 
$
(338,620
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
38,211
     
40,389
 
Amortization of debt issuance costs
   
26,103
     
-
 
Amortization of debt discount
   
344,956
     
-
 
Change in fair market value derivative liabilities
   
1,899,119
     
-
 
Derivative expense
   
12,586,255
     
-
 
Changes in operating assets and liabilities:
               
(Increase) Decrease in:
               
Accounts receivable
   
(37,722
)
   
(14,489
)
Inventory
   
(131,897
)
   
(9,818
)
Prepaid expenses and other
   
(108,016
)
   
(8,473
)
Increase (Decrease) in:
               
Accounts payable and accrued expenses
   
553,789
     
(117,645
)
Deferred revenue
   
(42,691
)
   
89,926
 
Other current liabilities
   
(9,185
)
   
 
Net Cash Used in Operating Activities
   
(2,930,514
)
   
(358,730
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
   
(24,700
)
   
-
 
Net Cash Used in Investing Activities
   
(24,700
)
   
-
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from convertible notes
   
1,467,500
     
-
 
Payments  on lines of credit
   
-
     
(40,869
)
Proceeds from notes payable
   
-
     
275,222
 
Proceeds from the release of cash restriction
   
900,000
         
Payments received on amounts due from officer
   
-
     
124,454
 
Net Cash Provided By Financing Activities
   
2,367,500
     
358,807
 
                 
Net Increase (Decrease) in Cash
   
(587,714
)
   
77
 
                 
Cash - Beginning of Period
   
921,711
     
276
 
                 
Cash - End of Period
 
$
333,997
   
$
353
 
                 
SUPPLEMENTARY CASH FLOW INFORMATION:
               
Cash Paid During the Period for:
               
Income Taxes
 
$
-
   
$
-
 
Interest
 
$
-
   
$
-
 
                 
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
                 
Debt discount on convertible notes
 
$
1,500,000
   
$
-
 
 
See accompanying notes to consolidated financial statements
 
 
F - 4

 
 
 
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.
 
 
 
F - 5

 
 
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.
 
 
 
F - 6

 
 
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.
 
 
 
F - 7

 
 
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.
 
 
 
F - 8

 
 
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.



 
F - 9

 
 
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.
 
 
F - 10

 
 
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.
 
 
 
F - 11

 
 
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%
 
(C)  
Debt Issuance Costs

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.
 
 
F - 12

 
 
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  


 
F - 13

 
 
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.

(A)  
Members’ Deficit

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.
 
(B)  
Common Stock

There were no stock issuances during the six months ended June 30, 2011 and 2010.

(C)  
Warrants

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.
 
F - 14

 

The Brainy Brands Company, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 2011 and 2010
 
Note 9 Contingencies

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  10 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 11 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. 

 
 
F - 15

 
 
PART II - OTHER INFORMATION
 
 
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
     
101.INS **    XBRL Instance Document
     
101.SCH**   XBRL Taxonomy Extension Schema Document
     
101.CAL**    XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.LAB**    XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.
     
101.DEF**    XBRL Taxonomy Extension Definition Linkbase Document .
 
**Filed with this report in accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 
 
3

 
 


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: September 14, 2011
By:
/s/ John Benfield   
    John Benfield  
    Chief Executive Officer (principal executive officer, principal financial officer, and principal accounting officer)  
       
 
 
 
4