10-Q/A 1 mainbody.htm MAINBODY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q /A

(Amendment No. 1)

 

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2011
 
[  ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from __________  to __________
 
Commission File Number:  333-153294

 

Smart Kids Group, Inc.

(Exact name of registrant as specified in its charter)

 

Florida 05-0554762
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

 

Harvard Square, One Mifflin Place 4th Floor, Cambridge, Massachusetts
(Address of principal executive offices)

 

(780) 222-6257
(Registrant’s telephone number)

 

Suite 234, 9768-170 St. Edmonton, AB Canada T5T 5L4

(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 [X] Yes    [ ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ] Yes [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. [ ]

 

[  ] Large accelerated filer  [  ]  Accelerated filer
[  ] Non-accelerated filer  [X] Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes   [X] No

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,400,517 as of November 14, 2011.

                    

EXPLANATORY NOTE

 

This filing contains restated financial statements of Smart Kids Group, Inc. for the period ended September 30, 2011 and 2010. Prior to the issuance of the original filing in Form 10-Q for the quarter ended March 31, 2012, the Company determined that legal fees of $5,612 and a loss on settlement of accounts payable with common stock of $63,000 were not recorded in the accounting records. In November 2010, the Company entered into an agreement to pay $3,500 of accounts payable with 354,864 shares of common stock valued at $66,500. The common stock was issued in February 2012. Common stock valued at $64,800 as finder’s fees were also expensed during the year ended June 30, 2011. In accordance with Staff Accounting Bulletin Topic 5A, Expenses of Offering, this should have been charged against the gross proceeds of the offering. Additionally a common stock payable valued at $7,500 for financing fees was unaccounted for when it was incurred in October 2010 and was later issued in March 2012. In July 2011, the Company entered into a Common Stock Purchase Warrant agreement with the same vendor for legal services. As of September 30, 2011, the fair value of the warrants of $43,986 were not recognized, resulting in an understatement of professional fees for the period ended September 30, 2011.

 

As a result of the errors stated above, the Company determined that there were significant changes in the Company’s Balance Sheets, Statements of Operations, and Statements of Cash Flow for the three months ended September 30, 2011 and 2010 for the period from inception (February 11, 2003) to September 30, 2011.

 

The following errors were found for the three months ended September 30, 2010:

 

  • Accounts payable and accrued expenses were understated by $5,612 due to unrecorded legal fees; and
  • Accumulated deficit during the development stage was understated by $5,612.

The effects on our previously issued September 30, 2010 financial statements are as follows:

 

Balance Sheet

 

    September 30, 2010       September 30, 2010
    As filed   Adjustments   Restated
LIABILITIES AND STOCKHOLDERS’ DEFICIT                        
Accounts payable and accrued expenses   $ 105,129     $ 5,612     $ 110,741  
Total current liabilities   $ 891,837     $ 5,612     $ 897,449  
Accumulated deficit during the development stage   $ (2,931,333 )   $ (5,612 )   $ (2,936,945 )
Total Liabilities and Stockholders Deficit  $17,519   $-   $17,519 


The following errors were found for the three months ended September 30, 2011 and for the period from inception (February 11, 2003) to Septemeber 30, 2011:

 

  • Accounts payable and accrued expenses were understated by $2,112 due to unrecorded legal fees;
  • Additional paid-in capital was overstated by $20,814 due to the Company not recognizing the granting of warrants valued at $43,986, offset by $64,800 due to incorrectly expensing finder’s fees;
  • Common stock payable was understated by $74,000 due to the granting of stock for finder’s fees and financing fees;
  • Accumulated deficit during the development stage was understated by $55,298;
  • Legal and professional fees were understated by $43,986 for the three months ended September 30, 2011 due to the granting of warrants;
  • Net loss was understated by $43,986 for the three months ended September 30, 2011;
  • Legal and professional fees were overstated by $15,202 for the period from inception (February 11, 2003) to September 30, 2011;
  • Loss on settlement of accounts payable was understated by $63,000 for the period from inception (February 11, 2003) to September 30, 2011;
  • Finance and interest expense was understated by $7,500 for the period from inception (February 11, 2003) to September 30, 2011;
  • Cash used for accounts payable and accrued expenses were understated by $5,612 for the period from inception (February 11, 2003) to September 30, 2011; and
  • Non-cash investing and financing activities for stock issued for accounts payable, accrued expenses and note payable were understated by $3,500 for the period from inception (February 11, 2003) to September 30, 2011.
2

The effects on our previously issued September 30, 2011 financial statements are as follows:

 

Balance Sheet

 

    September 30, 2011       September 30, 2011
    As filed   Adjustments   Restated
LIABILITIES AND STOCKHOLDERS’ DEFICIT                        
Accounts payable and accrued expenses   $ 259,982     $ 2,112     $ 262,094  
Total current liabilities   $ 860,888     $ 2,112     $ 863,000  
Additional paid-in capital   $ 3,119,224     $ (20,814 )   $ 3,098,410  
Common stock payable   $ 17,746     $ 74,000     $ 91,746  
Accumulated deficit during the development stage   $ (3,481,379 )   $ (55,298 )   $ (3,536,677 )
Total liabilities and stockholders’ deficit  $517,404   $-   $517,404 

 

Statement of Operations

 

    Three months ended       Three months ended
     September 30, 2011       September 30, 2011 
    As Filed   Adjustments   Restated
Legal and professional fees   $ 115,403     $ 43,986     $ 159,389  
Total operating expense   $ 185,134     $ 43,986     $ 229,120  
Loss before other expenses and income taxes   $ (185,134 )   $ (43,986 )   $ (229,120 )
Net loss   $ (191,500 )   $ (43,986 )   $ (235,486 )
Net loss per common share - basic  $(0.03)  $-   $(0.03)

 

Statement of Operations

 

    From inception       From inception
    (February 11, 2003)        (February 11, 2003)  
    to       to
    September 30, 2011         September 30, 2011
    As Filed   Adjustment   Restated
Legal and professional fees   $ 1,179,892     $ (15,202 )   $ 1,164,690  
Loss on settlement of accounts payable   $ —       $ 63,000     $ 63,000  
Total operating expense   $ 3,143,846     $ 47,798     $ 3,191,644  
Loss before other expenses and income taxes   $ (3,143,846 )   $ (47,798 )   $ (3,191,644 )
Finance and interest expense   $ (332,788 )   $ (7,500 )   $ (340,288 )
Net loss   $ (3,481,379 )   $ (55,298 )   $ (3,536,677 )

 

Statement of Cash Flows

 

    Three months ended       Three months ended
     September 30, 2011        September 30, 2011
    As Filed   Adjustments   Restated
Net loss   $ (191,500 )   $ (43,986 )   $ (235,486 )
Fair value of warrants   $ —       $ 43,986     $ 43,986  

 

3

Statement of Cash Flows

 

    From inception       From inception
     (February 11, 2003)        (February 11, 2003)
     to        to
     September 30, 2011        September 30, 2011
    As Filed   Adjustment   Restated
Net loss   $ (3,481,379 )   $ (55,298 )   $ (3,536,677 )
Issuance of common stock-services   $ 374,934     $ (64,800 )   $ 310,134  
Issuance of common stock-financing fees   $ 286,900     $ 7,500     $ 294,400  
Fair value of warrants   $ —       $ 43,986     $ 43,986  
Loss on settlement of accounts payable   $ —       $ 63,000     $ 63,000  
Accounts payable and accrued expenses   $ 516,354     $ 5,612     $ 521,966  
Non-cash investing and financing activities:                        
Stock issued for accounts payable, accrued expenses, and note payable   $ 855,172     $ 3,500     $ 858,672  
4

 

TABLE OF CONTENTS

 

 

Page

 

PART I – FINANCIAL INFORMATION

 
Item 1: Financial Statements F-1
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 6
Item 3: Quantitative and Qualitative Disclosures About Market Risk 9
Item 4: Controls and Procedures 9

 

PART II – OTHER INFORMATION

 

Item 1: Legal Proceedings 11
Item 1A: Risk Factors 11
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 11
Item 3: Defaults Upon Senior Securities 13
Item 4: Mine Safety Disclosures 13
Item 5: Other Information 13
Item 6: Exhibits 13

 

5

PART I - FINANCIAL INFORMATION

 

SMART KIDS GROUP, INC.

(A Development Stage Company)

Condensed Balance Sheets

 

    September 30,   June 30,
    2011   2011
    (Restated)   (Audited)
ASSETS                
Current assets                
Cash   $ 1,739     $ 4,595  
Prepaids     511,944       11,750  
Total current assets     513,683       16,345  
Fixed assets                
Equipment, net of accumulated depreciation of $851 and $737, respectively     283       340  
Investment in unconsolidated investee     —         99  
Other assets                
Software development costs, net of accumulated amortization of $2,063 and $1,375, respectively     3,438       4,125  
Total assets   $ 517,404     $ 20,909  
LIABILITIES AND STOCKHOLDERS' DEFICIT                
Current liabilities                
Accounts payable and accrued expenses   $ 262,094     $ 215,751  
Accrued expenses – related parties     600,906       572,206  
Total current liabilities     863,000       787,957  
Stockholders' deficit                
Preferred stock: $0.0001 par value; authorized 40,000,000 shares; issued and outstanding: 0 and 0, respectively     —         —    
Common stock: $0.0001 par value; authorized 1,800,000,000 shares; issued and outstanding: 9,251,692 and 5,387,025, respectively     925       539  
Additional paid-in capital     3,098,410       2,362,447  
Common stock payable     91,746       171,157  
Accumulated deficit during the development stage     (3,536,677 )     (3,301,191 )
Total stockholders' deficit     (345,596 )     (767,048 )
Total liabilities and stockholders' deficit   $ 517,404     $ 20,909  

 

The accompanying notes are an integral part of these condensed financial statements.

F-1

SMART KIDS GROUP, INC.

(A Development Stage Company)

Condensed Statements of Operations

(Unaudited)

 

            From inception
        (February 11,
    For the three months ended   2003) to
    September 30,   September 30,   September 30,
    2011
(Restated) 		  2010
(Restated) 		  2011
(Restated)
Revenues   $ —       $ —       $ —    
                         
Cost of goods sold     —         —         —    
Gross loss     —         —         —    
                         
Operating expenses                        
Salaries and wages     32,506       1,037       1,390,460  
Legal and professional fees     159,389       56,312       1,164,690  
General and administrative expenses     11,921       5,814       161,013  
Sub-licensing expense     15,000       273,008       345,137  
Allowance on stock receivable     —         —         57,040  
Impairment of equity investments     10,304       —         10,304  
Loss on settlement of accounts payable     —         —         63,000  
Total operating expenses     229,120       336,171       3,191,644  
                         
Loss before other expenses and income taxes     (229,120 )     (336,171 )     (3,191,644 )
                         
Other expense                        
Finance and interest expense     (6,366 )     (18,400 )     (340,288 )
Loss on conversion of note payable     —         —         (4,745 )
Total other expense     (6,366 )     (18,400 )     (345,033 )
                         
Net loss   $ (235,486 )   $ (354,571 )   $ (3,536,677 )
                         
Net loss per common share – basic   $ (0.03 )   $ (0.13 )        
                         
Weighted average number of common shares outstanding-basic     7,287,083       2,626,822          

 


The accompanying notes are an integral part of these condensed financial statements.

F-2

SMART KIDS GROUP, INC.

(A Development Stage Company)

Condensed Statements of Cash Flows

(Unaudited)

 

            From Inception
     Three months ended    Three months ended   (February 11, 2003) to
  September 30, 2011    September 30, 2010    September 30, 2011
  (Restated)    (Restated)   (Restated)
Cash flows from operating activities:                        
Net loss   $ (235,486 )   $ (354,571 )   $ (3,536,677 )
                         
Adjustments to reconcile net loss to net cash used in operating activities:                        
Issuance of common stock- services     63,839       22,863       310,134  
Issuance of common stock- sub-licensing fee     —         10,000       —    
Issuance of common stock- financing fees     —         18,400       294,400  
Fair value of warrants     43,986       —         43,986  
Loss on settlement of accounts payable     —         —         63,000  
Loss on conversion of note payable     —         —         4,745  
   Allowance on stock receivable     —         —         57,040  
Depreciation and amortization     744       57       11,488  
Deferred financing fee     —         —         15,000  
Impairment of equity investments     10,304       —         10,304  
Changes in current assets and liabilities:                        
Organizational costs     —         —         (8,575 )
Prepaid expense     —         (1,500 )     —    
Accounts payable and accrued expenses     46,343       (4,951 )     521,966  
Accrued expenses - related parties     28,700       263,009       1,423,855  
   Net cash used in operating activities     (41,570 )     (46,693 )     (789,334 )
                         
Cash flows from investing activities:                        
Investment in unconsolidated investee     (10,205 )     —         (10,304 )
Purchase of equipment     —         —         (1,134 )
   Net cash used in investing activities     (10,205 )     —         (11,438 )
                         
Cash flows from financing activities:                        
Proceeds from the issuance of stock     48,919       47,000       756,642  
Proceeds from equity draw down agreement     —         —         45,020  
Proceeds from note payable     —         —         5,849  
Payment on deferred financing fees     —         —         (5,000 )
   Net cash provided by financing activities     48,919       47,000       802,511  
                         
(Decrease) increase in cash     (2,856 )     307       1,739  
Cash, beginning of period     4,595       103       —    
Cash, end of period   $ 1,739     $ 410     $ 1,739  

 

The accompanying notes are an integral part of these condensed financial statements.

F-3

SMART KIDS GROUP, INC.

(A Development Stage Company)

Condensed Statements of Cash Flows

(Unaudited)

(Continued)

 

         
          From Inception
   Three months ended     Three months ended    (February 11, 2003) to
  September 30, 2011     September 30, 2010    September 30, 2011  
  (Restated)    (Restated)    (Restated) 
Supplemental disclosure of cash flow information:            
Cash paid during the period for:            
Interest   $ —       $ —       $ —    
Income taxes   $ —       $ —       $ —    
                         
Supplemental schedule of non-cash investing and financing activities:                        
Stock issued for prepaid expense   $ 558,000     $ —       $ 569,750  
Stock issued for equity draw down   $ —       $ 9,500     $ 109,060  
Stock issued for software development   $ —       $ —       $ 5,500  
Stock issued for accounts payable, accrued expense, and note payable   $ —       $ —       $ 858,672  
Payment of accounts payable by shareholder   $ —       $ —       $ 240,000  

 

The accompanying notes are an integral part of these condensed financial statements.

F-4

SMART KIDS GROUP, INC.

(A Development Stage Company)

Notes to the Condensed Financial Statements

(Unaudited)

 

 NOTE 1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Smart Kids Group, Inc. (“the Company”) was formed on February 11, 2003 (date of inception) under the laws of the State of Florida. The Company licenses technology and develops educational content and software.

 

As of September 30, 2011, the Company is a development stage company. A development stage enterprise is a company that is devoting substantially all of its efforts to establishing a new business and either planned principal operations have not commenced or planned principal operations have commenced but there has been no significant revenue. From February 11, 2003 (date of inception) through September 30, 2011, the Company did not realize any revenues and has not commenced its principal operations.

 

On April 23, 2010, the Company created Smart Kids Productions Inc., a Canadian corporation, incorporated on May 4, 2009, of which the Company has a 40% interest ownership.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The interim unaudited financial statements should be read in conjunction with the financial statements included in the Form 10-K for the year ended June 30, 2011.  In the opinion of management, all adjustments considered necessary for the fair presentation consisting solely of normal recurring adjustments, have been made.  Operating results for the three months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ended June 30, 2012.

 

The reporting currency of the Company is the U.S. dollar.  The Company has one bank account located in Canada and as a result, has re-measured the account from Canadian dollars to U.S. dollars.  The resulting translation adjustment has been recorded as an operating expense.

 

As used in these notes to the condensed financial statements, the terms the “Company”, “we”, “us”, “our” and similar terms refer to Smart Kids Group, Inc.  These condensed financial statements include all accounts of the Company. Significant accounting policies disclosed therein have not changed except as noted below.

 

Use of Estimates

 

The preparation of financial information in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial information and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Going Concern

 

The accompanying unaudited condensed financial statements have been prepared in conformity with US GAAP, which contemplate continuation of the Company as a going concern.  The Company has not begun generating revenue, is considered a development stage company, has experienced recurring net operating losses, had a net loss of $235,486 and $354,571 for the three months ended September 30, 2011 and 2010, respectively, accumulated deficit of $3,536,677 and a working capital deficiency of $349,317 at September 30, 2011.  

F-5

Management believes that additional capital will be required to fund operations through September 30, 2012 and beyond, as it attempts to generate revenues, and develops new products. Management intends to raise capital through additional equity offerings. There can be no assurance that the Company will be successful in obtaining financing at the level needed or on terms acceptable to the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company’s operations are subject to certain additional risks and uncertainties including, among others, dependence on outside suppliers and manufacturers, competition, dependence on its exclusive license and relationship with the licensor, uncertainties regarding patents and proprietary rights, dependence on key personnel, and other business risks. In addition, there is no assurance, assuming the Company is successful in raising additional capital that the Company will be successful in achieving profitability or positive cash flow.

 

Cash and Cash Equivalents

 

For purposes of the statement of cash flows, the Company considers highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. As of September 30, 2011 and June 30, 2011 the Company had no cash equivalents.

 

Fair Value of Financial Instruments

 

The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.

 

Fair Value Accounting

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The three levels of the fair value hierarchy are described below:

 

Level 1                           Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2                           Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3                           Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

Software Development Cost

 

Costs incurred internally in creating a computer software product are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.

 

F-6

Stockholders’ Equity


The Company has properly charged its offering costs directly attributable to a proposed or actual offering of securities against the gross proceeds of the offerings. We have recorded such costs as a reduction of equity.

 

As of September 30, 2011, the Company capitalized software of $3,438, net of accumulated amortization of $2,063 in internal software development costs.

Adopted


In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance will become effective for the Company with the reporting period beginning July 1, 2011. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.

Issued

 

In May 2011, the FASB issued an accounting standard update that amends the accounting standard on fair value measurements. The accounting standard update provides for a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. generally accepted accounting principles and International Financial Reporting Standards. The accounting standard update changes certain fair value measurement principles, clarifies the application of existing fair value measurement, and expands the fair value measurement disclosure requirements, particularly for Level 3 fair value measurements. The amendments in this accounting standard update are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting standard update will become effective for the reporting period beginning July 1, 2012. The adoption of this guidance will not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In June 2011, the FASB issued an accounting standard update which requires the presentation of components of other comprehensive income with the components of net income in either (1) a continuous statement of comprehensive income that contains two sections, net income and other comprehensive income, or (2) two separate but consecutive statements. This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity, and is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting standard update will become effective for the reporting period beginning July 1, 2012. The adoption of this guidance will not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In September 2011, the FASB issued an accounting standard update that amends the accounting guidance on goodwill impairment testing. The amendments in this accounting standard update are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this accounting standard update are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting standard update will become effective for the reporting period beginning July 1, 2012. The adoption of this guidance will not have a material impact on the Company’s financial position, result of operations or cash flows.

 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future financial position, results of operations or cash flows.

 

F-7

NOTE 2. CORRECTION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

The financial statements for the periods ended September 30, 2011 and 2010 have been restated for the following matter. Prior to the issuance of the original filing in Form 10-Q for the quarter ended March 31, 2012, the Company determined that legal fees of $5,612 and a loss on settlement of accounts payable with common stock of $63,000 were not recorded in the accounting records. In November 2010, the Company entered into an agreement to pay $3,500 of accounts payable with 354,864 shares of common stock valued at $66,500. The common stock was issued in February 2012. Common stock valued at $64,800 as finder’s fees were also expensed during the year ended June 30, 2011. In accordance with Staff Accounting Bulletin Topic 5A, Expenses of Offering, this should have been charged against the gross proceeds of the offering. Additionally a common stock payable valued at $7,500 for financing fees was unaccounted for when it incurred in October 2010 and was later issued in March 2012. In July 2011, the Company entered into a Common Stock Purchase Warrant agreement with the same vendor. As of September 30, 2011, the fair value of the warrants of $43,986 were not recognized, resulting in an understatement of professional fees for the period ended September 30, 2011.

 

As a result of the errors stated above, the Company determined that there were significant changes in the Company’s Balance Sheets, Statements of Operations, and Statements of Cash Flow for the three months ended September 30, 2011 and 2010 and for the period from inception (February 11, 2003) to June 30, 2011.

 

The following errors were found for the three months ended September 30, 2010:

 

  • Accounts payable and accrued expenses were understated by $5,612 due to unrecorded legal fees; and
  • Accumulated deficit during the development stage was understated by $5,612.

The effects on our previously issued September 30, 2010 financial statements are as follows:

 

Balance Sheet

 

    September 30, 2010       September 30, 2010
    As filed   Adjustments   Restated
LIABILITIES AND STOCKHOLDERS’ DEFICIT                        
Accounts payable and accrued expenses   $ 105,129     $ 5,612     $ 110,741  
Total current liabilities   $ 891,837     $ 5,612     $ 897,449  
Accumulated deficit during the development stage   $ (2,931,333 )   $ (5,612 )   $ (2,936,945 )
Total liabilities and stockholders’ deficit  $17,519   $-   $17,519  


The following errors were found for the three months ended September 30, 2011 and for the period from inception (February 11, 2003) to September 30, 2011:

 

  • Accounts payable and accrued expenses were understated by $2,112 due to unrecorded legal fees;
  • Additional paid-in capital was overstated by $20,814 due to the Company not recognizing the granting of warrants valued at $43,986, offset by $64,800 due to incorrectly expensing finder’s fees;
  • Common stock payable was understated by $74,000 due to the granting of stock for finder’s fees and financing fees;
  • Accumulated deficit during the development stage was understated by $55,298;
  • Legal and professional fees were understated by $43,986 for the three months ended September 30, 2011 due to the granting of warrants;
  • Net loss was understated by $43,986 for the three months ended September 30, 2011;
  • Legal and professional fees were overstated by $15,202 for the period from inception (February 11, 2003) to September 30, 2011;
  • Loss on settlement of accounts payable was understated by $63,000 for the period from inception (February 11, 2003) to September 30, 2011;
  • Finance and interest expense was understated by $7,500 for the period from inception (February 11, 2003) to September 30, 2011;
  • Cash used for accounts payable and accrued expenses were understated by $5,612 for the period from inception (February 11, 2003) to September 30, 2011; and
  • Non-cash investing and financing activities for stock issued for accounts payable, accrued expenses and note payable were understated by $3,500 for the period from inception (February 11, 2003) to September 30, 2011.

F-8

The effects on our previously issued September 30, 2011 financial statements are as follows:

 

Balance Sheet

 

    September 30, 2011       September 30, 2011
    As filed   Adjustments   Restated
LIABILITIES AND STOCKHOLDERS’ DEFICIT                        
Accounts payable and accrued expenses   $ 259,982     $ 2,112     $ 262,094  
Total current liabilities   $ 860,888     $ 2,112     $ 863,000  
Additional paid-in capital   $ 3,119,224     $ (20,814 )   $ 3,098,410  
Common stock payable   $ 17,746     $ 74,000     $ 91,746  
Accumulated deficit during the development stage   $ (3,481,379 )   $ (55,298 )   $ (3,536,677 )
Total liabilities and stockholders’ deficit  $517,404   $-   $517,404 

 

Statement of Operations

 

    Three months ended       Three months ended
     September 30, 2011       September 30, 2011 
    As Filed   Adjustments   Restated
Legal and professional fees   $ 115,403     $ 43,986     $ 159,389  
Total operating expense   $ 185,134     $ 43,986     $ 229,120  
Loss before other expenses and income taxes   $ (185,134 )   $ (43,986 )   $ (229,120 )
Net loss   $ (191,500 )   $ (43,986 )   $ (235,486 )
Net loss per common share - basic  $(0.03)  $-   $(0.03)

 

Statement of Operations

 

    From inception       From inception
    (February 11, 2003)        (February 11, 2003)  
    to       to
    September 30, 2011         September 30, 2011
    As Filed   Adjustment   Restated
Legal and professional fees   $ 1,179,892     $ (15,202 )   $ 1,164,690  
Loss on settlement of accounts payable   $ —       $ 63,000     $ 63,000  
Total operating expense   $ 3,143,846     $ 47,798     $ 3,191,644  
Loss before other expenses and income taxes   $ (3,143,846 )   $ (47,798 )   $ (3,191,644 )
Finance and interest expense   $ (332,788 )   $ (7,500 )   $ (340,288 )
Net loss   $ (3,481,379 )   $ (55,298 )   $ (3,536,677 )

F-9

Statement of Cash Flows

 

    Three months ended       Three months ended
     September 30, 2011        September 30, 2011
    As Filed   Adjustments   Restated
Net loss   $ (191,500 )   $ (43,986 )   $ (235,486 )
Fair value of warrants   $ —       $ 43,986     $ 43,986  


Statement of Cash Flows

 

    From inception       From inception
     (February 11, 2003)        (February 11, 2003)
     to        to
     September 30, 2011        September 30, 2011
    As Filed   Adjustment   Restated
Net loss   $ (3,481,379 )   $ (55,298 )   $ (3,536,677 )
Issuance of common stock-services   $ 374,934     $ (64,800 )   $ 310,134  
Issuance of common stock-financing fees   $ 286,900     $ 7,500     $ 294,400  
Fair value of warrants   $ —       $ 43,986     $ 43,986  
Loss on settlement of accounts payable   $ —       $ 63,000     $ 63,000  
Accounts payable and accrued expenses   $ 516,354     $ 5,612     $ 521,966  
Non-cash investing and financing activities:                        
Stock issued for accounts payable, accrued expenses, and note payable   $ 855,172     $ 3,500     $ 858,672  

 

NOTE 3. PREPAID EXPENSE

 

As of September 30, 2011 and June 30, 2011, the Company had prepaid expenses of $511,944 and $11,750. For the three months ended September 30, 2011, prepaid expense of $558,000 was paid through the issuance of the Company’s common stock of which $57,806 has been expensed.

 

NOTE 4. UNCONSOLIDATED INVESTEE

 

In August 2011, the Company paid $10,205 to its unconsolidated investee, Smart Kids Productions, (“SK Productions”) as an investment. The Company has an agreement with SK Productions for the re-packaging of the Company’s intellectual property relating to Be Alert Bert®. As of September 30, 2011, the Company determined that its investment in SK Productions should be fully impaired due to Production’s continued net loss, and recognized an impairment of unconsolidated investees of the $10,205 invested in August, and the initial investment of $99 in May 2010.

F-10

NOTE 5. RELATED PARTY TRANSACTIONS

 

Accrued expenses – related parties

 

    September 30,   June 30,
    2011   2011
                 
Unpaid officer compensation   $ 562,723     $ 549,023  
Sub-license expense     38,183       23,183  
Total accrued expenses – related parties   $ 600,906     $ 572,206  

 

As of September 30, 2011 and June 30, 2011, the Company incurred amounts due to related parties of $600,906 and $572,206. The liability consists of payments due under employment agreements of $562,723 to our Chief Executive Officer and Chief Operating Officer and sub-licensing fees of $38,183 for the intellectual property with Smart Kids International Holdings, Inc., (“SKIH”). As of September 30, 2011 and June 30, 2011, $475,558 of unpaid officer compensation is due to the former Chief Executive Officer, Paul Andrew Ruppanner who was terminated pursuant to Section 1.7 (c)(4) of his employment agreement dated August 1, 2005 (Exhibit 10-4) as filed in an Form 8-K dated April 27, 2010. The remaining $87,165 as of September 30, 2011, is due to our Chief Operating Officer. All accrued expenses – related parties have been expensed in the Statement of Operations in the period incurred.

  

NOTE 7. STOCKHOLDERS’ EQUITY

 

The authorized common stock of the Company consists of 1,800,000,000 shares of common stock with par value of $0.0001 and 40,000,000 shares of preferred stock. As of September 30, 2011 and June 30, 2010 the Company had 9,251,692 and 5,387,025 common stock and zero preferred stock outstanding.

 

In October 2011, upon majority of votes by the Company’s stockholders, the Company affected a 100 to 1 reverse stock split of its outstanding common stock. All share amounts have been retroactively restated to reflect this reverse split.

 

On August 8, 2011, the Company issued 600,000 (post split) shares of restricted common stock valued at $0.22 (post split) per share or $132,000 as a prepayment of consulting services. The shares were valued at the fair market value on July 13, 2011, the agreement date.

 

On August 8, 2011, the Company issued 300,000 (post split) shares of restricted common stock valued at $0.22 (post split) per share or $66,000 as a prepayment of consulting services. The shares were valued at the fair market value on July 25, 2011, the agreement date.

 

On August 8, 2011, the Company issued 350,000 (post split) shares of restricted common stock valued at $0.25 (post split) per share or $87,500 as a prepayment of consulting services. The shares were valued at the fair market value on July 20, 2011, the agreement date.

 

On August 8, 2011, the Company issued 600,000 (post split) shares of restricted common stock valued at $0.25 (post split) per share or $150,000 as a prepayment of consulting services. The shares were valued at the fair market value on July 19, 2011, the agreement date. In accordance with the consulting agreement, an additional 60,000,000 shares are due contingent upon the Company’s stock value exceeding a minimum of $0.03 per share for 20 consecutive days.

 

On August 8, 2011, the Company issued 50,000 (post split) shares of restricted common stock valued at $0.23 (post split) per share or $11,500 as a prepayment of consulting services. The shares were valued at the fair market value on July 8, 2011, the agreement date.

 

On August 8, 2011, the Company issued 300,000 (post split) shares of restricted common stock valued at $0.19 (post split) per share or $57,000 as a prepayment of consulting services. The shares were valued at the fair market value on September 1, 2011, the agreement date.

 

On August 10, 2011, the Company issued 13,333 (post split) shares of restricted common stock valued at $0.15 (post split) per share or $2,000 for consulting services. The shares were valued at the fair market value on July 30, 2011 per the terms of the agreement.

F-11

On August 17, 2011, the Company issued 540,000 (post split) shares of restricted common stock valued at $0.12 (post split) per share or $64,800 for finder’s fees as a reduction of equity. The shares were valued at the fair market value on April 28, 2011, the agreement date.

 

On August 17, 2011, the Company issued 125,000 (post split) shares of restricted common stock for cash consideration of $0.04 (post split) per share or $5,283.

 

On August 17, 2011, the Company issued 25,000 (post split) shares of restricted common stock valued at $0.20 (post split) per share or $5,000 as a prepayment of consulting services. The shares were valued at the fair market value on August 17, 2011, the grant date.

 

On August 17, 2011, the Company issued 25,000 (post split) shares of restricted common stock valued at $0.20 (post split) per share or $5,000 as a prepayment of consulting services. The shares were valued at the fair market value on August 17, 2011, the grant date.

 

On August 17, 2011, the Company issued 513,000 (post split) shares of restricted common stock for cash consideration of approximately $0.11 (post split) per share or $58,246.

 

On September 14, 2011, the Company issued 13,334 (post split) shares of restricted common stock valued at $0.19 (post split) per share or $2,533 for consulting services. The shares were valued at the fair market value on August 31, 2011, per the terms of the agreement.

 

On September 22, 2011, the Company issued 400,000 (post split) shares of restricted common stock valued at $0.11 (post split) per share or $44,000 as a prepayment of consulting services. The shares were valued at the fair market value on August 19, 2011, the agreement date.

 

On September 22, 2011, the Company issued 10,000 (post split) shares of restricted common stock valued at $0.15 (post split) per share or $1,500 for services. The shares were valued at the fair market value on September 21, 2011, the agreement date.

 

Warrants

 

In July 2011, the Company issued 200,000 warrants with an exercise price of $0.0001 per share for seven years in connection with unpaid legal fees. The warrants vested immediately and were fair valued at $43,986. No warrants were exercised as of September 30, 2011.

 

The fair value of the warrants were estimated on the date of grant using the Black-Scholes option valuation model that uses the assumption noted in the following table. Expected volatilities are based on volatilities from a comparable company given the limited historical stock information of the Company. The expected term of the warrant granted determined using the actual period of time that the warrants granted were excercised. The risk-free rate for the period within the contractual life of the warrant is based on the U.S. Treasury bond rate in effect at the time of grant for bonds with maturity dates at the estimated term of the warrant.

 

    September 30, 2011
Expected volatility     369.56 %
Weighted-average volatility     146.85 %
Expected dividends     —    
Expected term (in years)     1.00  
Risk-free rate     0.170 %

 

F-12

Warrants   Shares   Weighted-Average
Exercise Price 		  Weighted-Average
Remaining Contractual
Term 		  Aggregate Intrinsic Value
Outstanding at June 30, 2011     —       $ —               $ —    
Granted     200,000       0.0001       1.0       —    
Exercised, forfeited or expired     —         —         —         —    
Outstanding at  September 30, 2011     200,000     $ 0.0001       1.0     $ —    
Exercisable at September 30, 2011     200,000     $ 0.0001       1.0     $ —    

 

Non-vested Warrants   Warrants   Weighted-Average Grant-Date Fair Value
  Non-vested at June 30, 2011       —       $ —    
  Granted       200,000       0.22  
  Vested       (200,000 )     (0.22 )
  Forfeited       —         —    
  Non-vested at September 30, 2011       —       $ —    

 

Stock payable

 

As of September 30, 2011, the Company received cash consideration of $17,746 for the purchase of restricted common stock. The shares have not been issued as of September 30, 2011.

 

As of September 30, 2011, the Company granted 350,000 (post split) shares of common stock as payment towards accounts payable totaling $3,500. The shares were valued at $66,500, and has not been issued as of September 30, 2011. The Company has incurred a loss on settlement of accounts payable of $63,000.

 

As of September 30, 2011, the Company granted 30,000 (post split) shares of common stock valued at $7,500 as finder’s fees that has not been issued as of September 30, 2011.

 

NOTE 8. SUBSEQUENT EVENTS

 

Subsequent to September 30, 2011, the Company had the following stock transactions:

 

-In October 2011, upon majority of votes by the Company’s stockholders, the Company affected a 100 to 1 reverse stock split of its outstanding common stock.
-On October 25, 2011, the Company issued 380,000 (post split) shares of restricted common stock valued at $0.10 (post split) per share or $38,000 as payment of outstanding sub-licensing fees. The shares were valued at the fair market value on October 25, 2011, the grant date.
-On October 25, 2011, the Company issued 300,000 (post split) shares of restricted common stock for cash consideration of $30,000 or $0.10 per share.
-On October 25, 2011, the Company issued 468,825 (post split) shares of restricted common stock valued at $0.10 (post split) per share or $46,883 as payment of outstanding accounts payables. The shares were valued at the fair market value on October 25, 2011, the grant date.

 

On October 11, 2011, the board of directors appointed Mr. Marcel Scherger to act as a member of our board of directors as filed in a Form 8-K on October 12, 2011.

 

On October 17, 2011, the Company, entered into a merger transaction with Paragon GPS Inc., a Delaware corporation (“Paragon”), pursuant to an Agreement and Plan of Merger, by and among the Company, SKGI Acquisition Corp., a Nevada corporation, incorporated on October 14, 2011 and a wholly-owned subsidiary of the Company, and Paragon as filed in a Form 8-K on October 18, 2011, and amended on October 26, 2011.

F-13

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.   These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Overview

 

We are a development stage company incorporated in the State of Florida on February 11, 2003 that holds the rights to intellectual property of the Be Alert Bert® character and his friends. The intellectual property contains educational and entertainment media product, including television shows, videos, music, and books owned by Smart Kids International Holdings, Inc., a company owned by our Chief Executive Officer and Director, Richard Shergold.

 

Our business plan for the next twelve months is to refurbish, edit and repackage our existing product line of television shows, videos and books for media placement and retail sale. This plan includes locating distribution channels for our products and associated marketing efforts. We estimate that we will need approximately $350,000 to accomplish these tasks. As such, we are currently searching for avenues of financing to accomplish these goals.

 

In addition to repackaging our existing products for sale, we intend to develop new media products based on our licensed intellectual property. We are working on a series of television shows titled the “The Adventures of Bert and Claire.” We are also working to launch a website to display, market and retail our products named, “the Smartkids Community” (www.smartkidscommunity.com). We intend to charge an annual membership fee (after a 30 day trial period) of $19.99 per family which will provide them with access to some of our content and through which they will be able to purchase our videos, music, books and other content that we either sublicense or produce. We launched our company website in April, 2011 (www.smartkidsgroup.com), but our design is contingent on the availability of financing. To develop our new television series and launch our interactive website, we will need roughly $2 million in capital.

 

We have also launched a community-oriented Smart Kids Travel Company, our website is smartkidsgroup.com. This will be a full service travel agency capable of fulfilling vacation and business needs. It will also focus on the travel needs of the members of the Smart Kids Community. Smart Kids Travel is managed by Gary Javorsky, a seasoned travel agency owner, with over 20 years experience selling travel products and services. Through the Smart Kids Travel Website, customers will be able to research destinations, attractions, accommodations and so much more, with departures from across Canada and the United States to any destination around the world. Customers will be able to compare prices from the most popular travel suppliers and contact the Smart Kids Travel Agency to make reservations with the assistance of a personal travel consultant who will make sure that the customer gets exactly what is wanted at the very best price available. In the near future, Smart Kids Travel will post specials oriented towards kids and great family vacations that will give both children and their family’s memorable experiences that will last a lifetime.

6

The financial statements for the periods ended September 30, 2011 and 2010 have been restated for the following matter. Prior to the issuance of the original filing in Form 10-Q for the quarter ended March 31, 2012, the Company determined that legal fees of $5,612 and a loss on settlement of accounts payable with common stock of $63,000 were not recorded in the accounting records. In November 2010, the Company entered into an agreement to pay $3,500 of accounts payable with 354,864 shares of common stock valued at $66,500. The common stock was issued in February 2012. Common stock valued at $64,800 as finder’s fees were also expensed during the year ended June 30, 2011. In accordance with Staff Accounting Bulletin Topic 5A, Expenses of Offering, this should have been charged against the gross proceeds of the offering. Additionally a common stock payable valued at $7,500 for financing fees was unaccounted for when it incurred in October 2010 and was later issued in March 2012. In July 2011, the Company entered into a Common Stock Purchase Warrant agreement with the same vendor for legal services. As of September 30, 2011, the fair value of the warrants of $43,986 were not recognized, resulting in an understatement of professional fees for the period ended September 30, 2011.

 

As a result of the errors stated above, the Company determined that there were significant changes in the Company’s Balance Sheets, Statements of Operations, and Statements of Cash Flow for the three months ended September 30, 2011 and 2010 and for the period from inception (February 11, 2003) to September 30, 2011.

 

Results of Operations

 

Revenues. We had no revenues from our inception on February 11, 2003 to September 30, 2011.  We do not expect to achieve revenues until we are able to successfully implement our business plan.

 

Operating expenses . Our operating expenses include licensing expenses, salaries and wages, general and administrative expenses, legal and professional fees. For the three months ended September 30, 2011, we incurred an operating loss of $229,120 compared to an operating loss of $336,171 for the three months ended September 30, 2010, a change of 32%. This was primarily due to a decrease in sub-licensing expense of $258,008 due to the signing of a then active sub-licensing agreement with 3DFV in September 2010. The agreement and sub-licensing fee was cancelled in December 2010. This was offset by an increase in salaries and wages of $31,469 due to the reinstatement of salaries in January 2010, legal and professional fees of $103,077 due to an increase primarily in accounting, consulting fees, and the issuance of warrants in connection with outstanding legal fees, and an increase in general and administrative expenses of $6,107, and impairment of equity investments of $10,304 as of September 30, 2011.

 

We anticipate operating expenses to increase in the next twelve months in accordance with our business plan to refurbish, edit and repackage our existing product line of television shows, videos and books for media placement and retail sale.

 

Net Loss . We had a net loss of $235,486 for the three months ended September 30, 2011 compared to a net loss of $354,571 for the three months ended September 30, 2010. The decrease of $119,085 was primarily due to the decrease in operating expenses stated above, and a decrease of $12,034 for finance and interest expenses due to more stock being issued to past investors.

 

Liquidity and Capital Resources

 

As of September 30, 2011, we had total current assets of $513,683 and total assets in the amount of $517,404. Our total current liabilities as of September 30, 2011 were $863,000.  We had an accumulated deficit of $3,536,677 and a working capital deficit of $349,317 as of September 30, 2011.

 

Cash used in operating activities decreased to $41,570 for the three months ended September 30, 2011 compared to $46,693 for the three months ended September 30, 2010 as a result of a decrease in stock issued for financing and sub-licensing fees and due to related parties, offset by an increase in stock issued for services, impairment of unconsolidated investee, the granting of warrants, and accounts payables.

 

Cash used in investing activities increased to $10,205 for the three months ended September 30, 2011 compared to no cash used in investing activities for the three months ended September 30, 2010. The increase was due to the investment in unconsolidated investee of $10,205.

 

Cash flows provided by financing activities during the three months ended September 30, 2011 of $48,919 compared to $47,000 for the three months ended September 30, 2010, consisted of proceeds from the issuance of common stock that stayed relatively the same.

 

7

Based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.

 

Going Concern

 

At September 30, 2011, we had $1,739 cash on-hand and an accumulated deficit of $3,536,677 , and as noted throughout this report and our financial statements and notes thereto, our independent auditors have expressed their substantial doubt as to our ability to continue as a going concern as of September 30, 2011. We anticipate incurring significant losses in the future. We do not have an established source of revenue sufficient to cover our operating costs. Our ability to continue as a going concern is dependent upon our ability to successfully compete, operate profitably and/or raise additional capital through other means. If we are unable to reverse our losses, we will have to discontinue operations.

 

The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business.

 

Management’s plans include the raising of capital through the equity markets to fund future operations, seeking additional acquisitions, and generating of revenue through our business. However, even if we do raise sufficient capital to support our operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable us to develop business to a level where we will generate profits and positive cash flows from operations. These matters raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Policies

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

Use of Estimates

 

The preparation of financial information in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial information and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Stock Based Compensation

 

Stock based compensation is accounted for using the Equity-Based Payments to Non-Employee Topic of the FASB ASC, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. We determine the value of stock issued at the date of grant. We also determine at the date of grant the value of stock at fair market value or the value of services rendered (based on contract or otherwise) whichever is more readily determinable.

 

8

Shares issued to employees are expensed upon issuance.

 

Stock based compensation for employees is accounted for using the Stock Based Compensation Topic of the FASB ASC.  We use the fair value method for equity instruments granted to employees and will use the Black Scholes model for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

 

Software Development Cost

 

Costs incurred internally in creating a computer software product are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.

 

Revenue and Cost Recognition

The Company recognizes revenue using the accrual method of accounting wherein revenue is recognized when earned and expenses and costs are recognized when incurred. Since inception of the business on February 11, 2003 through September 30, 2011, the Company has not realized any revenue.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4.     Controls and Procedures

 

Disclosure Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2011.  This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer.  Based upon that evaluation, our Chief Executive Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that, as of September 30, 2011, our disclosure controls and procedures were not effective:

 

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§ We were unable to maintain any segregation of duties within our financial operations due to our reliance on limited personnel in the finance function;

§ We do not have an independent Board of Directors, nor do we have a board member designated as an independent financial expert for the Company. The Board of Directors is comprised of two (2) members of management. As a result, there may be lack of independent oversight of the management team, lack of independent review of our operating and financial results, and lack of independent review of disclosures made by the Company; and

§ Documentation of all proper accounting procedures is not yet complete.

§ Prior to the issuance of the original filing in Form 10-Q for the quarter ended March 31, 2012, the Company determined that legal fees of $5,612 and a loss on settlement of accounts payable with common stock of $63,000 were not recorded in the accounting records. In November 2010, the Company entered into an agreement to pay $3,500 of the accounts payable with 354,864 shares of common stock valued at $66,500.  The common stock was issued in February 2012. Common stock valued at $64,800 as finder’s fees were also expensed during the year ended June 30, 2011.  In accordance with Staff Accounting Bulletin Topic 5A, Expenses of Offering, this should have been charged against the gross proceeds of the offering. Additionally a common stock payable valued at $7,500 for financing fees was unaccounted for when it incurred in October 2010 and was later issued in March 2012. In July 2011, the Company entered into a Common Stock Purchase Warrant agreement with the same vendor for legal services.  As of September 30, 2011, the fair value of the warrants of $43,986 were not recognized, resulting in an understatement of professional fees for the period ended September 30, 2011.

 

Due to the material weakness in internal control over financial reporting, we determined that the previously issued financial condition and results of operations disclosed in the our Annual Report on Form 10-K as of and for the year ended June 30, 2011 and the our Quarterly Reports on Form 10-Q for the periods ended March 31, 2011, September 30, 2011 and December 31, 2011 could no longer be relied upon. This Form 10-Q/A for the three months ended September 30, 2011 amends the September 30, 2011 and 2010 consolidated financial statements.

 

Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting

 

Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting.  During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes:

 

§ We have engaged an accounting firm that specializes in smaller reporting companies to perform our internal bookkeeping and external financial reporting;

§ We have engaged a new securities legal counsel to perform consulting services and to review our filings for regulation compliance;

§ Expanding our current board of directors to include additional independent individuals willing to perform directorial functions; and

§ Increasing our workforce in preparation for exiting the development stage and commencing revenue producing operations.

 

Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting.  During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the all the material weaknesses identified above.

 

Since the recited remedial actions will require that we hire or engage additional personnel, these material weaknesses may not be overcome in the near term due to our limited financial resources. Until such remedial actions can be realized, we will continue to rely on the advice of outside professionals and consultants. Failure to obtain financing will prevent us from curing any of the above stated deficiencies.  To reduce the risk of material misstatements we have increased our segregation of duties by engaging an accounting firm to perform our internal record keeping and external financial reporting function.

 

Changes in Internal Control over Financial Reporting

 

None.

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PART II – OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

Item 1A:  Risk Factors

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 8, 2011, the Company issued 600,000 (post split) shares of restricted common stock valued at $0.22 (post split) per share or $132,000 as a prepayment of consulting services. The shares were valued at the fair market value on July 13, 2011, the agreement date.

 

On August 8, 2011, the Company issued 300,000 (post split) shares of restricted common stock valued at $0.22 (post split) per share or $66,000 as a prepayment of consulting services. The shares were valued at the fair market value on July 25, 2011, the agreement date.

 

On August 8, 2011, the Company issued 350,000 (post split) shares of restricted common stock valued at $0.25 (post split) per share or $87,500 as a prepayment of consulting services. The shares were valued at the fair market value on July 20, 2011, the agreement date.

 

On August 8, 2011, the Company issued 600,000 (post split) shares of restricted common stock valued at $0.25 (post split) per share or $150,000 as a prepayment of consulting services. The shares were valued at the fair market value on July 19, 2011, the agreement date.

 

On August 8, 2011, the Company issued 50,000 (post split) shares of restricted common stock valued at $0.23 (post split) per share or $11,500 as a prepayment of consulting services. The shares were valued at the fair market value on July 8, 2011, the agreement date.

 

On August 8, 2011, the Company issued 300,000 (post split) shares of restricted common stock valued at $0.19 (post split) per share or $57,000 as a prepayment of consulting services. The shares were valued at the fair market value on September 1, 2011, the agreement date.

 

On August 10, 2011, the Company issued 13,333 (post split) shares of restricted common stock valued at $0.15 (post split) per share or $2,000 for consulting services. The shares were valued at the fair market value on July 30, 2011, per the terms of the agreement.

 

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On August 17, 2011, the Company issued 540,000 (post split) shares of restricted common stock valued at $0.12 (post split) per share or $64,800 for finder’s fees as a reduction of equity. The shares were valued at the fair market value on April 28, 2011, the agreement date.

 

On August 17, 2011, the Company issued 125,000 (post split) shares of restricted common stock for cash consideration of $0.04 (post split) per share or $5,283.

 

On August 17, 2011, the Company issued 25,000 (post split) shares of restricted common stock valued at $0.20 (post split) per share or $5,000 as a prepayment of consulting services. The shares were valued at the fair market value on August 17, 2011, the grant date.

 

On August 17, 2011, the Company issued 25,000 (post split) shares of restricted common stock valued at $0.20 (post split) per share or $5,000 as a prepayment of consulting services. The shares were valued at the fair market value on August 17, 2011, the grant date.

 

On August 17, 2011, the Company issued 513,000 (post split) shares of restricted common stock for cash consideration of approximately $0.11 (post split) per share or $58,246.

 

On September 14, 2011, the Company issued 13,334 (post split) shares of restricted common stock valued at $0.19 (post split) per share or $2,533 for consulting services. The shares were valued at the fair market value on August 31, 2011, per the terms of the agreement.

 

On September 22, 2011, the Company issued 400,000 (post split) shares of restricted common stock valued at $0.11 (post split) per share or $44,000 as a prepayment of consulting services. The shares were valued at the fair market value on August 19, 2011, the agreement date.

 

On September 22, 2011, the Company issued 10,000 (post split) shares of restricted common stock valued at $0.15 (post split) per share or $1,500 for services. The shares were valued at the fair market value on September 21, 2011, the agreement date.

 

On October 25, 2011, the Company issued 380,000 (post split) shares of restricted common stock valued at $0.10 (post split) per share or $38,000 as payment of outstanding sub-licensing fees. The shares were valued at the fair market value on October 25, 2011, the grant date.

 

On October 25, 2011, the Company issued 300,000 (post split) shares of restricted common stock for cash consideration of $30,000 or $0.10 per share.

 

On October 25, 2011, the Company issued 468,825 (post split) shares of restricted common stock valued at $0.10 (post split) per share or $46,883 as payment of outstanding accounts payables The shares were valued at the fair market value on October 25, 2011, the grant date.

 

These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

 

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Item 3.     Defaults upon Senior Securities

 

None

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

None

 

Item 6.      Exhibits

 

Exhibit Number Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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.

 

Smart Kids Group, Inc.
 
Date: June 8, 2012
 

By: /s/ Thomas Guerriero

Thomas Guerriero

Title:    Chief Executive Officer

 

 

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